Human capital investments: Preferences, Opportunities, Constraints

Education has long been known as “human capital”, the capital involved in producing higher wages and augmenting labor productivity. It has also been associated with better nonmarket outcomes, including better health, lower crime and higher social cohesion. The high private and social benefits of education have motivated extensive research on determinants of schooling choices and skills. My dissertation uses data from a developing country, Indonesia, and studies the role of parents in children’s education during primary and secondary school in late 1990s, around the period of the East Asian Financial Crisis. I study two main questions in order to understand the implications of the crisis for children. First, I examine whether only children with low expected returns from education selected out of schooling during the crisis. I find significant negative effects of school dropout soon after the crisis on mathematics test scores, suggesting that the crisis induced some parents to pull children out of school even though they had the potential to do well. This analysis shows the importance of short-run constraints for school enrollments in Indonesia. Second, I explore how parents allocate education resources between their children at the intensive margin. I find that, on average, parental education spending is not a function of children’s test scores. However, parents are more sensitive to the human capital of younger female children and penalize them for having lower scores compared to their older siblings of either gender. Thus, girls appear to be more vulnerable to resource constraints as parents reduce investments and likely provide them with worse quality of education. Schooling in Indonesia is associated with high labor market returns. Thus, my research shows that much can be gained by insuring children against short-run shocks that have long-run consequences. As an extension, I also examine whether the crisis had short-run labor market effects as well. I test whether males living in urban areas were less willing to take risks when making occupation choices soon after the crisis. The results of this analysis, however, are ambiguous. Better data should allow answering this question more conclusively in the future