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Premium on Fields of Study: The Returns to Higher Education in Singapore

The rate of return for tertiary education tends to be higher compared to non-tertiary education.  Professional and more technical fields of study at university degree level also have higher rates of returns than less technical ones. These are some of the key findings of an occasional paper on "Premium on Fields of Study: The Returns to Higher Education in Singapore" which is the result of a collaborative study between the Ministry of Manpower (MOM) and the Singapore Centre for Applied and Policy Economics (SCAPE), Department of Economics, National University of Singapore. The objective of the paper is to study the private rates of returns to investment in education for workers, with particular focus on the returns to education for various fields of study at the polytechnic diploma and university first degree levels.

2.   The study uses an econometric model involving a Mincerian-type earnings function to estimate the rate of return to education in terms of an increase in wages for each additional year of study. The basic premise is that education enhances the productivity of a worker, which in turn is reflected in his earnings. The estimation controls for differences in other worker characteristics e.g. gender and work experience, which may also affect earnings.  The key results are as follows:

a. The rate of return for an extra year of schooling is positive and significant. The rate tends to be higher for tertiary education (i.e., diploma and degree) as compared to non-tertiary education. In addition, the returns to university education have generally increased in 2004 compared to 2001. These findings are in line with the changing economic structure of the Singapore economy.  As the economy shifts towards higher value-added and knowledge activities, there is a greater demand for more educated workers, which in turn enhances the returns to higher levels of education.

b. The rates of return to secondary and primary education, on the other hand, were broadly unchanged in 2004 compared to 2001. Less educated workers are subjected to competition posed by low wage workers from China, India and other developing countries as a result of the effects of globalisation. This could have curbed their wage increases, and hence, partly account for the lack of improvement in returns to secondary and below education levels.

c. In general, the professional and more technical fields of study (e.g., Law, Health Sciences, and Engineering Sciences) at the first degree level have higher rates of return than the less technical subjects (e.g., Humanities & Social Sciences). Furthermore, the rates of return for most fields of study have improved in 2004, except for Information Technology, Architecture & Building and Mass Communication & Information Science. The fall in the rates of return for these fields of study could be attributed to the negative shock from burst of the bubble and the slower growth in the construction industry.

d. At the polytechnic diploma level, Engineering Sciences, Architecture & Building and Business & Administration have the highest rates of return in 2004. The rates of return for all fields of study, except Health Sciences, are lower in 2004 compared to 2001. The higher rate of return for the study in Health Sciences reflects the increase in demand for allied health professionals.  The higher demand for Health Sciences manpower is also observed with a higher rate of return for Health Sciences graduates at the first degree level in 2004.

3.   In summary, the returns to investment in education in Singapore tend to increase with years of schooling, with the returns to tertiary education generally higher than those for non-tertiary education.  This is similar to the findings for other Asian newly industrialised economies like South Korea and Hong Kong.

4.   In a rapidly changing small-open economy like Singapore, the growth of potential human capital is crucial to attaining sustainable growth in the long-run. As the structure of Singapore's economy shifts towards higher value-added and knowledge activities, there will be a continued increase in the demand for skilled and educated human capital. We can thus expect the demand for workers with tertiary education to increase, which implies that the rate of returns to tertiary education is likely to remain high and above those for secondary and below education. Education will hence continue to be an attractive investment for individuals.

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5.    The report is available online on the Ministry of Manpower's website.