Spring
1216
The Human Capital Theory
Presented to Dr. N. Al Iskandarani By Nathalie Alphonse
08
Fall
Table of Contents
The United States’ Investments in Education
Expected Returns from Human Capital Investments in the United States
The Human Capital Theory
Investments on Education in Egypt
Reasons for the Low Return on Education in Egypt
Other Non-Financial Motivations for Human Capital Investments
Implications for the Human Capital Theory
Indices
Annex
References
The United States’ Investments in Education
Business leaders in the United States targeted a $3.5 Billion investment in education and training in 2011. In 2012, the education budget in the United States reached 68.1 Billion and the department of education is seeking a 2.5% increase in the budget for 2013.
Expected Returns from Human Capital Investments in the United States
These tremendous amounts of investments are made in order to receive expected returns on those investments. Returns include global competitiveness. For instance, “a recent report by McKinsey & Company estimates that bringing lower-performing states up to the national average between 1983 and 1998 would have added $425 billion to $710 billion to our [their] 2008 GDP.” Another research shows that “closing the international achievement gap between 1983 and 1998 would have added $1.3 trillion to $2.3 trillion to our [their] 2008 GDP.” Another form of return is economic returns; if half the students that had dropped out of high school in 2012 had graduated, they would have added $7.6 Billion in earnings per year, $5.6 Billion in spending and $2 Billion in investing. Moreover, investing in education leads to cost savings. Estimates show that “taxpayers are spared up to $13 for every $1 invested in quality early education”. High graduation rates reduce the incarceration rates and poverty levels, which leads to costs savings. Another form of return is restoring the middle class. Jobs acquired by the middle class require the attainment of an education or training beyond the secondary school. Another societal benefit is the political awareness; in Andrew Delbanco’s new book “College: What It Was, Is, And Should Be”, he emphasizes the importance of education in a democratic system, he says that “We cannot have a political system that works if we don’t have a population that say knows the difference between a dogmatic opinion or a demagogic speaker and somebody who makes arguments based on evidence”. He also stated some private returns such as higher lifetime income and higher chances of being employed. He mentioned that college graduates have an unemployment rate that is almost half the nation’s jobless rate. Moreover, he also stated some non-financial benefits such as happier marriages and better health.
The Human Capital Theory
This somewhat conforms to the theory of human capital. According to the theory. Investments in education will be made if the present value of the future returns on the investment is bigger than the present value of the costs of the investment. So a person will decide to go to college if the present value of the incremental earnings that he will receive is bigger than the present value of the direct and indirect costs of attending college. The theory can also be applied for employers’ decisions to invest in their employees. Obviously, the employers would only invest in the employees’ human capital if the present value of their returns of the investment is bigger than the present value of the cost of the investment. In this paper, I intend to examine human capital investment decisions in Egypt. By using Internet based and field-based research, I shall investigate the factors that affect human capital investment decisions and test for the validity of the theory against the results of the research.
Investments on Education in Egypt
According to Nancy Birdsall and Lesley O’Connell, the investments on education in Egypt are pretty significant, providing free pre-college education. For a more detailed illustration of the numbers, please refer to figure 4. The highest Egypt has invested in education was seen in the year 2002 with around 1,200 Billion Egyptian Pounds with a budget of 5 Billion Dollars. Although it’s not nearly close to the United States’ 68 Billion Dollars, it’s still considered significant as a percentage of total expenditures and as a percentage of the GDP compared to other developing countries. Gross enrollment in schools has greatly increased for both boys and girls, 80% of school-age students are enrolled in primary school and 68% are enrolled in secondary school. Also adult literacy has increased from 25% in 1960 to 51% in 1995. The mean number of years of schooling for children that are 10 years and older has increased from 1.6 in 1960 to at least 5 in 1996.
The phrase “education is a matter of national security” is commonly used among Egyptian politicians which expresses their belief in that education is the way to economic growth, productivity and self sufficiency. Former minister of education emphasized that education affects the citizens’ productivity, which is what differentiates one nation from another. This shows that on a societal level, investments in education are made in expectations for future returns in the form of higher productivity and economic growth.
Reasons for the Low Return on Education in Egypt
Despite the increased enrollment and literacy, those investments are not realizing any form of quantifiable returns. The rate of return on primary, secondary and higher education in Egypt is respectively 4.7%, 7.7% and 14.2%, all lower than global and regional averages. This poor outcome was due to many factors. One factor is the poor quality of education; even though the quantity has been mounting, the quality has been diminishing. That is due to the demographic pressure on the limited resources. The poor quality led to drop out ratios that reached up to 30%. As for the students who finished their years of schooling, their education was so poor that it had no real economic value and it didn’t translate into incremental earnings, private returns or economic growth. A very interesting finding by Fergany shows that incremental earnings for the people attending primary or intermediate school compared to those that didn’t finish them or didn’t attend in the first place are actually negative. This could mean that the motivation and entrepreneurial skills of those with more years of schooling is actually lower than those with lower or no years of schooling. This shows how bad the quality of education had really become. We need to relate this finding with the theory of Human Capital. The theory claims that the higher the years of education, the higher the earnings. But the above findings show that sometimes, the educated can’t earn as much as the uneducated. This goes against the theory as it proves quite the opposite of what the theory says. Interviews conducted with the children of a doorman confirm the above findings, his daughter rarely attends school and depends on costly private lessons in order to get by. Moreover, his eldest son had decided to drop out of school when he was fourteen, then has worked as a wall painter ever since, he doesn’t regret that he left school as he is doing quite well in his current job. On the other hand, his younger son chose to finish school and college, he graduated with a law degree a year ago and has not found a job ever since. We can try to relate these findings with the interviews I conducted. Samir who was working at Kheir Zaman and Mohsen who worked at Family Market both seemed satisfied with their education. They mentioned that they benefited either from the social skills they gained or the technical skills. This could mean that the higher college education in Egypt is better than the primary and secondary education. But maybe it was the poor quality of the high school education was the reason for their low scores in Thanaweyya Amma as they mentioned. Another factor is that expenditures on education are not equally distributed. Also, “public spending on education is poorly allocated and ineffective, that the poor and the middle class will fall behind in education, setting the stage for a future society that is more segmented and with higher income inequality.” The poor quality of public education pushes the poor to take private lessons making the “free” education not really for free anymore – as illustrated with the doorman’s daughter’s situation above. Between the years 1980 and 1990, the costs of education for the poor have increased 7 times in urban areas and 10 times in rural areas. Hence, education reinforced the transmission of poverty and poor standards of living across the generations. The above 2 factors are the reason for the poor economic returns on investments in human capital. This can be observed in a study made by Fergany, which saw no link between the GDP growth and the education in Egypt. This in turn can be the result of the low private returns that individuals experience on their years of schooling relative to other developing countries. “Private returns to primary, secondary and higher education for males (measured as the increase in wages for each year of schooling) are 8.3, 31.7, 62.1 percent, respectively”. Fore more details on the annual earnings in Egypt, please refer to figure 2. Both interviewees expressed their satisfaction with their income levels and they both stated that their jobs more than covered the costs of education that were very low. Samir did mention that the more the years of the education, the higher the position and the higher the pay for employees at Family Market. This supports the theory of Human Capital. However, this does not necessarily mean that the returns on education are the highest they could be. We should note something interesting: it is easier to cover the investments on education on an individual level but when it comes to the societal level, covering the investments on education is not that easy. This could be the result of the high subsidies that the government provides for education. Another factor that prevents the investment in education from showing positive results on the economy is the mismatch between the demand for and the supply of labor. This little demand can be the result of deficiencies in overall economic policy and also onerous labor legislations that increase the cost of labor for the employers. We should note though that there’s a difference between what the laws say what how they are actually applied in Egypt. 80% of the workers in the private are classified in the informal economy where “they can be laid off any time, they have no provisions for retirement or disability, and they have no legal recourse in disputes against their employers”. The fact that the supply of graduates (who are poorly qualified because of their weak education) is bigger than the demand for labor leads to keeping the wages at low levels, hence, the low private returns on investments in education. Another reason for the mismatch between the supply and demand is the lingering effect of the Employment Guarantee Scheme established in the 1960s. This scheme guaranteed public-sector employment for all graduates of secondary and post-secondary institutions, which led to an increase in enrollment and in the number of graduates. The large private informal sector could not afford the skills of those graduates, the public sector was unable to respond to all the supply and the private formal sector was too small to contain all those graduates and was unwilling to hire poorly educated workers. This mismatch between the demand and the supply might have been the reason why Samir would have had to use nepotism and connections in order to work in communications – the field which he studied. Another factor that we can examine is the regional segmentation of labor. Because of the lack of labor demand in certain regions, the lack of development and production resources, the earnings differ greatly among the regions. The limited mobility of labor forces the workers to endure the low levels of earnings. Earnings in Rural Lower Egypt, Rural Upper Egypt, Urban Lower Egypt, and Urban Upper Egypt are respectively 11.5%, 28%, 18%, and 27% less than Greater Cairo. This is reflected in the lower returns on education in other regions than Greater Cairo. For more details, please review Figure 1. Another reason is the mismatch between the skills required by the labor market and the skills provided by education. “Enterprise surveys in Egypt indicate that the school to work transition is complex and firms report that worker skills and education are among the top five constraints in the business climate”. This again relates to the quality of the education that is failing to supply the students with the adequate needed skills. Samir did mention that he never used any of the technicalities that he learned in college or at school and he added that Kheir Zaman does not look for technical skills as much as they look for general ones. In contrast, Mohsen, the manager of Family Market mentioned that they looked for specific skills in accountants and agricultural engineers which they can’t easily find! Another important factor is the increasing household cost of education. Even though the education is supposedly free, parents do incur costs such as private lessons, uniforms, transportation, textbooks, stationary and more importantly the opportunity cost of the jobs that those students could get. One of the reasons the eldest son of the doorman decided to drop out of school was that he saw an opportunity and he didn’t want to wait while his father struggled to provide for the family. That’s why he took the job, “the job is going well thanks to God, I wouldn’t have made that much money had I attended college,” he told me.
Other Non-Financial Motivations for Human Capital Investments
On a more private level, realizing positive financial returns on education does not seem to be the only motive for investing on education. Education motives could very much be non-financial. One particularly interesting research showed that “female education plays a significant role in having a marriage with better characteristics”. Women can increase their chances of a better marriage through three ways: higher status men would prefer to marry educated women, educated women can find higher status men easier because of their interactions in the education environment, and education would increase a woman’s competitiveness in the marriage market. I asked 3 women at Kheir Zaman super market whether they thought that their education would facilitate their opportunities for marriage, they all said yes. Moreover, education could be pursued for the pleasure of it. For example, someone could go to college and study a major that is not really profitable in Egypt just because they like it. A friend of mine graduated from the American University in Cairo with an Art degree, which is not really such a profitable major in Egypt. A year later, she went back to college because she wanted to get a major in Music since she sang at the Opera and was really interested in the subject. This is an example of someone who saw college as pure consumption. Another reason is the social status that a certificate brings to a person. For instance, someone might attend college just because society tells them to, because it somehow raises their social value – when they’re not really intending on working in their major’s field or in applying anything they would learn in college. My cousin is a perfect example, he never intended to work in business, he wanted to pursue a career in music. He only majored in Business so that he would have a certificate. A very interesting reason to attend college was guilt! Some people would get high scores in their high school and so they feel pressured to attend college instead of “wasting” such a great score.
Implications for the Human Capital Theory
It is clear that the theory of human capital does not really hold in Egypt. First, because the return on education (social and many times private) rarely reflects the huge investments that are dedicated to education. In other words, the present value of the costs of education is much higher than the present value of the profits that result from those investments. Still, the government spends money on a project that is not really profitable. Second, the theory focuses only on financial and monetary returns as a basis for decision making when in reality, non-financial motives are considered as factors in the human capital investments. Also, we should not forget the interesting finding that showed negative earnings differentials with more years of schooling and completely going against the theory. These results were proven by the above research and were confirmed through interviews with workers, colleagues and students.
Indices
Figure 1:
Figure 2:
Figure 3:
Figure 4:
Annex
Interviews with Managers of Private and Public Sector Supermarkets
The plan was to interview the manager of a Kheir Zaman branch and that of a Metro branch and compare the two. I had decided to do that because the same person owns both Metro and Kheir Zaman. But Kheir Zaman targets segments that are lower than the ones targeted by Metro. I had thought it would be interesting to compare the working conditions of both workplaces.
I started by Kheir Zaman, I went in, headed for the butcher as my parents usually deal with him and I asked for the manager. With a kind smile on his face, he went inside and fetched the manager; a middle aged man wearing a grey shirt and black pants, the usual uniform. He approached and greeted me in a friendly manner. “How can I help you?” he asked while smiling. I explained to him that I needed to interview him for a project and he gladly agreed to give me all the time I needed.
Samir had graduated from the Communications Institute because that’s the best place that his Diploma score would get him. “I was very smart, I studied day and night”, he said enthusiastically, “but my mind went blank in the exams,” he added in a quieter tone. Nevertheless, he explained that he liked Communications and wanted to work in the field but was never able to. He added that to work in communications he had to use nepotism and he had to have many connections, a path he wasn’t willing to take. “I would have worked in the field had I found an opportunity”, he said. He also said that he chose Communications not just because he was interested in the topic but also because he thought that it would be financially rewarding and would easily cover the costs that were a mere 200 pounds per year. The cost-benefit analysis of going to college was not an issue for him because neither the direct nor the indirect costs were that high for him. He didn’t need a paying job urgently when he was attending the Institution. When I asked him whether his hiring depended on him having a certain degree, he said that it depended on the position he was applying for in the Supermarket. A manager’s position would require someone at least highly qualified (mo2ahel 3ali), while a cashier’s position would demand at least a medium qualification (mo2ahel motawaset). He explained that the skills that they look for in an employee are discipline, social skills and hygiene which I found to be quite general and independent of the educational background. I asked him if the skills that he was taught in his years of schooling were of any use to him when he joined the supermarket, he said that they were of no use in technical terms but that he learned on the social side. For instance, he benefited from social skills such as: how to handle situations and how to talk to people and manager relationships with the clients. I highly doubt that they taught him those skills at school. Samir found out about the job through relatives, it wasn’t through newspaper ads or through career offices at the Institution. Working as a manager at Kheir Zaman is Samir’s only job but he mentioned that he does depend on another source of income from a land that he owns in Banha. His current income is quite sufficient to support his wife and four children. Even if he hadn’t owned the land, he stated that his income from the supermarket would have been sufficient. At Kheir Zaman, the minimum wage is 1000 EGP, meaning that those holding the lowest positions such as janitors receive 1000 EGP. I didn’t want to ask how much he earned but I guessed that it would be a lot more. He said that the pay was independent of the level of education; it depended on the position which relied solely on the skills. “Whatever God provides is enough,” he said with a thankful tone. The contracts at Kheir Zaman are yearly. When I asked him if that makes him feel insecure because he might not get renewed, he answered by saying that he never worries about being laid off. He explained that the system of the yearly contract is put in place so that if someone was not good enough, they would let him go. But he seemed trusting in that the company would not fire a competent employee. Samir thought that the insurance benefits that the Kheir Zaman employees enjoy is of the “best tranche”, he seemed pretty satisfied with it. He also explained that the compensation scheme is based on the performance of the company and the profits of all the branches combined. The amount of compensation received depends on the performance evaluation of the employees by their superiors. Samir explained that the A category receives a compensation higher than B and C. I was quite surprised to find him use English words such as “compensation, guest, expired”, he seemed to have a better English language than I would have expected. “The compensation scheme makes us feel like the company is our own,” he added with a proud smile on his face. I also asked him whether the company offered any on the job training. He told me that formerly, new employers would be trained for three days then they would start working. But then they changed the system, nowadays; new employees work for 6 months then receive the training. I was quite startled to hear that, it just didn’t seem rational to me. Samir explained saying that the new system was less costly for the company. When asked to rate his level of satisfaction with his work at Kheir Zaman, Samir gave it an 8/10. So I asked for some of the negative aspects of working there, he mentioned only one example: when a product is brought to the supermarket already expired, they charge it on the salaries of the employees instead of dealing with the suppliers for the mistakes. “Why don’t you complain?” I asked. He said that they did complain many times but that the company has a certain system which it is not willing to change. “If you have 2 applicants for the job of a cashier, a man and a woman and the woman is more qualified than the man, who would you hire?” I asked him with interest. “The man,” Samir replied with no hesitation. He justified that by saying that a man can work longer hours than a woman. I was surprised when he told me that he was leaving Kheir Zaman to work in another supermarket, the name of which he refused to give me. He had seemed loyal enough for the company after 8 years. He explained saying that it wasn’t just because of the better pay and that it was mainly because he didn’t feel comfortable working at Kheir Zaman anymore.
I thanked the man, left Kheir Zaman and headed for the closest Metro. Again, I found the manager but this time, it was completely different. The man rushed towards me and greeted me with a fake smile. “How can I help you?” he asked in a rushed tone. As soon as I started explaining to him what I was doing, he was completely against the idea and told me firmly that it was against the company rules. I tried to explain that I would not need any confidential information but he insisted that it was completely forbidden. I thanked him anyways and got out. My plan was all messed up now, the comparison I was planning on making failed. I started thinking then I came up with a new idea, comparing a private sector supermarket – namely Kheir Zaman – with a public sector supermarket. I knew of one called Family Market that was close by and so I decided to go and try my luck.
I went in and asked for the manager. Of course the contrast of the environment between Kheir Zaman or Metro and Family Market could not go unnoticed. The supermarket did look like a public store; dusty, old and disorganized. Anyway, I was led to a backroom where a man sitting on a desk pointed to a man hanging on a steel ladder; that was the manager. He was wearing loose pants and a worn out shirt – no sign of a uniform. His beard hadn’t been shaven for a few days and he was sweaty. He was extremely welcoming and promised to help me out with whatever I needed. He kept on admiring the work I did and wishing me good luck and success.
I found out that Mohsen had graduated from the school of Commerce with a concentration in Accounting. Like Samir, he chose this school because of the score he managed to get in Thanaweya Amma and he seemed satisfied enough with it. He also said that he liked accounting and that he welcomed the idea of working in that field when he graduated. Unlike Samir, Mohsen did work in his field of study and stated that he did benefit from the skills that he was taught at the university when he started working. When I asked him why he chose to attend college instead of joining the labor market as soon as he graduated from high school, he said that that was the norm at the time. “You go to school, you graduate then you go to university then you work, that’s how it goes,” he said. So he didn’t base his decision on a cost benefit analysis. In fact, he mentioned that the cost of going to college was so insignificant and that his parents easily covered it so the cost was not an issue. He also didn’t need a paying job urgently so he went with the flow and chose to attend college. When I asked him about the qualifications that Family Market searched for in applicants, he said that they look for Commerce graduates and Agricultural Engineering graduates. Having a certificate mattered more in Family Market than it did at Kheir Zaman where they were only looking for more general skills. He added that the pay would differ with the position and the level of education, the higher the level of education, the higher the position and the higher the pay. The lowest wage given at Family Market is not less than 700 pounds for those who do not have contracts and not less than 1,500 EGP for those who have contracts. I also assumed that he gets much more than that but I didn’t want to ask. When I asked him about the hiring process, he said that a person is trained for 6 months during which he receives a pay then after two years his contract becomes fixed and that contracts are renewed on a yearly basis. He added that the yearly contract system works well for both the company and the employees. Sometimes the employee is not competent enough and so the system allows the company to let him go if needed and sometimes the employees cannot stand the long hours of the job and they want to quit. The official hours of work are 8 hours per day with no days off but that is never the case; the employees work at least 12 hours a day with overtime pay. Many people would not want that work life. Unlike Kheir Zaman, they do not run 2 shifts per day so they have to make the employees work overtime. I also asked him how he found out about the job and like Samir, it wasn’t through the official channels, it was through acquaintances. He mentioned that after he graduated he went to Saudi Arabia then he return back to Egypt and has been working at Family Market ever since. He had left Saudi because he wanted to start a family in Egypt. Just like the compensation at Kheir Zaman, it is based on the profits of the mother company. Promotions are based on the number of years of work rather than performance. They also have an insurance plan because they are a public sector. I was interested to find out whether the revolution made any difference at Family Market, at first Mohsen snapped saying, “you know, everything is much worse, people have lost respect and manners, because I deal with people everyday, I have to put up with it.” “What about changes in the company itself?” I repeated the question. He explained that some of the demands of the employees were acceptable and so they were implemented. Examples included, higher wages, more benefits and less working hours. However, irrational individual demands are not acceptable. I asked him the same question I asked Samir, “If you have 2 applicants for the job of a cashier, a man and a woman and the woman is more qualified than the man, who would you hire?” He looked at me and proudly said that he’d definitely choose the better skilled. I was impressed by his answer though I couldn’t be sure of whether he was telling the truth. Finally, I asked him if there were any reasons for dissatisfaction or if he would consider switching jobs. He replied by saying, “so long as a person has gratitude, he will always be satisfied no matter the pay… I wouldn’t leave the place here, not after 26 years”. He sounded really emotional as if he was speaking of his wife not his workplace. But then again, this attitude is not uncommon among the middle class Egyptians who never fail to be one of the kindest people on earth.
Obviously, the comparison between the private and public sector supermarkets was very interesting. Although there are many differences, the common aspects are not as few as I expected. The private and the public sector are not as far away from each other as I expected. But as shown from the interviews, they differ in the pay, the training process, the procedures for promotions, the working hours, the general appearance and a few other issues.
References
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