Estimating the Rate of Return of Education in the Informal Sector of Ghana

Abstract

This research aims to investigate the rate of return of education at different educational levels in order to prove that obtaining a basic education is beneficial for employment in the formal and informal sector. The informal sector is an unregulated market sector comprised of heterogeneous activities such as trading and other self-employed activities in the labor market. This study uses 2005 data from Ghana, collected by the Centre for the study of African Economies (CSAE). We use the Mincer wage equation and the Instrumental Variable (IV) approach to find whether education does matter for workers in the informal sector. We found positive returns at all levels of education in both sectors. However, there were no returns to obtaining a primary education in the formal sector. The results of our findings suggest that education does matter for informal sector workers because compared to an illiterate worker, there is an 11.6% higher return associated with obtaining a basic education in the informal sector.