Returns to schooling, ability and cognitive skills in Pakistan

This study investigates the economic outcomes of education for wage earners in Pakistan. This is done by analysing the relationship between schooling, cognitive skills and ability, on the one hand, and economic activity, occupation, sectoral choice and earnings, on the other. In Pakistan, an important question remains largely unaddressed: what does the coefficient on ` schooling' in conventional earning function estimates measure? Whereas human capital theory holds that the economic return to an extra year of schooling measures productivity gains acquired through additional schooling, the credentialist view argues that it represents a return to acquired qualifications and credentials, and a third view, the signalling hypothesis, suggests that it captures a return to native ability. This paper seeks to adjudicate between these theories using data from a unique purposedesigned survey of more than 1000 households in Pakistan, collected in 2007. The paper also examines the shape of the education-earnings relationship in Pakistan as a way of testing the poverty-reducing potential of education in Pakistan.