The Economic Returns to Foundational Literacy and Numeracy: Evidence from Indonesia

Despite rapid increases in access to school in low- and middle-income countries, learning outcomes remain extremely poor. This has led to calls for a new policy focus on ensuring foundational literacy and numeracy skills. Yet we have little direct, causal evidence on the long-term effects of investing in foundational skills in the early years of school. In this paper, we estimate the relationship between early-grade skills and adult earnings, using longitudinal data from the Indonesia Family Life Survey. Individuals are tested in foundational literacy and numeracy between the ages of 7 and 12 and then followed through multiple survey rounds to adulthood between the ages of 24 and 29. After adjusting for family background in childhood, a one standard deviation difference in foundational skills is associated with an 11 percent increase in adult earnings. This effect is mediated in part but not primarily by completed schooling. Those with higher foundational skills as children are less likely to have had children themselves by age 24-29. We don’t see correlations with other health outcomes. If the associated relationship can be interpreted as causal, this magnitude of returns implies a large positive benefit-cost ratio for investments in foundational skills.