Sheepskin and Working Experience Effects on Wage in Indonesia: The Importance of Signaling

The level of education can serve as a screening or signaling device in selecting workers who are detected through a sheepskin or diploma effect. This study will estimate the diploma effect on wage, and examines the pattern that is expected to disappear as work experience augments. The estimation technique used is Heckman’s two-step in which variables years of schooling and diploma are included together as exogenous to Mincerian earnings equation. The data used is the 2006 SUSENAS. From the earnings equation, the effects are seen when diploma is interacted with type of occupation and economic sector. The highest diploma effect, in the magnitude of 52.11 percent, is experienced by blue collar workers who have university diploma in agriculture. The diploma effects of D-III and university decrease with concomitant increase in work experience, but not for high school diploma. Benefit of investment in education is only enjoyed by the grey collar workers in the service after they complete 16 years of schooling, unless the diploma effect is taken into account in the rate of return on educational investment. Government is advised to continue the 9-year compulsory education program until high school education and prevent drop out of school from happening