Rates of Returns to Vocational and General Upper Secondary Education, and to Experience in Addressing the Hollow Middle in Indonesia, 2007

We estimate the rates of returns to Vocational and General Upper Secondary Education, or SMK and SMA respectively, based on Susenas 2007 by taking into account two types of selectivity bias. The first bias is due to school choice (Pasay and Quarina, 2009) and the second one is the inverse Mills ratio in the Mincerian earnings function. Our unit of analysis is restricted to those individuals who at the time of the survey were the sons or daughters of the household heads and whose age ranged between 15 and 60 years, were not attending school and who had the highest education level of general or vocational high school, or lower than the secondary education level (as a reference group). The study reveals that SMA male graduates, with an average working experience of 6.19 years, will enjoy higher rates of returns when working as employees compared to as employers or others. The highest rate of returns of 11.7% is enjoyed by the employees working in the tertiary sector of the economy; and the next highest rate of 9.56% is in the primary and secondary sectors. For SMK male graduates, at the average experience of 6.23 years, the private rate of returns for male employees in all sectors of the economy is 3.43 percent. For those male who are employers and others in all sectors, the private rate of returns is almost half of the former (1.73%). For females, entering and graduating from high school will be expected to earn an annual rate of return of 10.47% for SMA graduates and slightly higher rate of 10.51% for SMK graduates. There is not much difference in the private rate of returns between SMA and SMK graduates. The rates of returns to experience for SMA male graduates will be at peak when they have a working experience of 14.86 years, and the SMK graduates have an experience of 9.28 years. For females, the peak will be at 11 years of experience. Policies to promote the quality of general and vocational upper secondary education in accord with market requirements will help overcome the case of ‘hollow middle’ in labor market.