Transition to Financial Independence
of the Youth in Asian countries:
is there a pay-off to extended
education?
Nicole Mun Sim Lai
Monash University Sunway Campus
As the number of college students in Asia has
risen twelve-fold, from 3.9 million in 1970 to
46.7 million in 2007, it appears that college
education, once viewed as a luxury, may now
be a necessity if one wishes to have high
earnings (UNESCO 2009).
0.00
India, 1999
Indonesia, 2005
China, 2002
Philippines, 1999
Uruguay, 1994
1.00
Chile, 1997
4.00
Thailand, 2004
Finland, 2004
6.00
Mexico, 2004
Austria, 2000
US, 2003
South Korea,…
Hungary, 2005
France, 2001
Slovenia, 2004
7.00
Costa Rica, 2004
Source: Lee and Mason (2009)
Japan, 2004
Sweden, 2003
Taiwan, 2003
human capital spending per child
/average labor income aged 30-
Human Capital Spending Around the World
Public education plays a
larger role in Europe ,
USA & some Latin
America
5.00
Public
3.00
Public
2.00
Private
Private
3
Source: Lee and Mason (2009)
0.00
India, 1999
Indonesia, 2005
China, 2002
1.00
Philippines, 1999
4.00
Uruguay, 1994
5.00
Costa Rica, 2004
6.00
Chile, 1997
7.00
Thailand, 2004
Finland, 2004
Mexico, 2004
Austria, 2000
US, 2003
South Korea,…
Hungary, 2005
France, 2001
Slovenia, 2004
Japan, 2004
Sweden, 2003
Taiwan, 2003
human capital spending per child
/average labor income aged 30-
Human Capital Spending Around the World
Private education is
more important in
Asia
Public
3.00
2.00
Public
Private
Private
4
The high education investment may delay
individuals from joining the workforce and
ultimately increase the economic dependency
(economic lifecycle deficits) of the young
When do the young produce more than they
consume?
Does furthering one’s higher education pay?
Method
National Transfer Accounts www.ntaccounts.org
Comprehensive estimates on consumption,
production, transfers and asset reallocations by
age structure
Provides research opportunities to examine the
economic allocations over the lifecycle and assess
the associated policy implications
Mean Private Consumption & Mean Labor Income
1.4
Relative to mean labor income 30-49
1.2
1
0.8
0.6
Private Consumption
0.4
0.2
0
0
20
40
Age
60
80
Mean Private Consumption & Mean Labor Income
1.4
Relative to mean labor income 30-49
1.2
Financial Independence
YL>PC
1
0.8
0.6
Private Consumption
0.4
Labor Income
0.2
0
0
20
40
Age
60
80
Mean Total Consumption & Mean Labor Income
1.4
1.4
Adding Public
Consumption
Relative to mean labor income 30-49
1.2
1.2
11
Total Consumption
0.8
0.8
0.6
0.6
Private Consumption
0.4
0.4
Labor Income
0.2
0.2
00
0
0
20
20
40
40
Age
60
60
80
80
Mean Private Consumption & Mean Labor Income
1.4
1.4
1.2
Full Economic Self-Sufficiency
YL>TC
Relative to mean labor income 30-49
1.2
1
1
Total Consumption
0.8
0.8
0.6
0.6
0.4
0.4
Labor Income
0.2
0.2
00
00
20
20
40
40
Age
6060
8080
Factors Affecting the Timing
•
•
•
•
•
•
•
labor income
capital income
saving rates
college enrollment size
short-term economic fluctuations
public policy
support ratios
Financial Independence Around the World
Senegal (2005)
Nigeria (2004)
Mexico (2004)
Indonesia (2005)
India (2004)
Brazil (2002)
Costa Rica (2004)
Philippines (1999)
Chile (1997)
Germany (2003)
Thailand (2004)
Japan (2004)
USA (2003)
Spain (2000)
Slovenia (2004)
Republic of Korea (2000)
Hungary (2005)
Kenya (1994)
Finland (2004)
Uruguay (2006)
Sweden (2003)
China (2002)
Austria (2000)
In most countries,
young adults are
financially
independent
between 23 and
25 years old
0
5
10
Age
15
20
25
Young adults in
Austria, China,
and Sweden
become
financially
independent at
earlier ages (19–
21 years
old)
30
35
Financial Independence Around the World
Senegal (2005)
Nigeria (2004)
Mexico (2004)
Indonesia (2005)
India (2004)
Brazil (2002)
Costa Rica (2004)
Philippines (1999)
Chile (1997)
Germany (2003)
Thailand (2004)
Japan (2004)
USA (2003)
Spain (2000)
Slovenia (2004)
Republic of Korea…
Hungary (2005)
Kenya (1994)
Finland (2004)
Uruguay (2006)
Sweden (2003)
China (2002)
Austria (2000)
The young in
Nigeria, Mexico,
and Indonesia
become financially
independent at a
very late age
(between 27 and
33 years old)
0
5
10
15
Age
20
25
30
35
Full Economic Self-Sufficiency
Senegal (2005)
Nigeria (2004)
Mexico (2004)
Indonesia (2005)
India (2004)
Brazil (2002)
Costa Rica (2004)
Philippines (1999)
Chile (1997)
Germany (2003)
Thailand (2004)
Japan (2004)
USA (2003)
Spain (2000)
Slovenia (2004)
Republic of Korea (2000)
Hungary (2005)
Kenya (1994)
Finland (2004)
Uruguay (2006)
Sweden (2003)
China (2002)
Austria (2000)
In most
countries,
young adults
reach full
economic selfsufficiency
between 25 and
27 years old.
0
10
20
Age
30
40
When do the young produce more than they
consume?
Does furthering one’s higher education
pay?
Returns to Higher Education
Stylized Facts
1. global returns to education yield about 10%
per schooling year
2. returns for females are higher than for males
3. general academic streams pay more than
vocational streams
4. professional fields pay more than humanities
5. return is more prominent in low and middleincome countries than in high-income
countries
Mean Labor Income by Level of Education
(index base=100 for upper secondary)
250
Latin America
Index
200
150
OECD
100
50
Lower Secondary
Upper Secondary
Source: Patrinos HA & Psacharopoulos G, 2010
Tertiary
Mean Labor Income by Level of Education
(index base=100 for upper secondary)
250
Index
200
Human capital is still
scarce in Latin America
and Asia (except Korea
and Japan) relative to
OECD countries.
Latin America
Republic of China
China Urban
150
OECD
China Rural
100
50
Lower Secondary
Upper Secondary
Tertiary
Comparing Returns Over Time
• Republic of China experiences diminishing
returns to higher education
• China is going through the stage of increasing
returns to higher education
Comparing Mean Labor Income by Gender & by Areas
Tertiary Female
Tertiary Male
Republic of China Urban 2005
Republic of China Rural 2005
Upper Female
China Urban 2002
Upper Male
China Rural 2002
Junior Female
Junior Male
0
50
100
150
200
• both men and women have higher earnings
when they have higher educational levels
• in rural areas, basic education (primary &
junior high) is more important than the
tertiary education level to the income levels
• In urban regions, the returns are highest at
the tertiary educational level
• The returns at the tertiary level are similar for
males and females in China, as opposed to the
general trend of higher returns for males in
other countries
Conclusions
• We would expect to see an early financial
independence age in low-income economies where
entry into the labor force occurs at an early age
• However, the financial independence age is quite
similar across countries
• It shows that although the young are working in
low income economies, their labor income tends
to be very small
Low Income Economies
• Furthermore, the young are a large portion of the
population in low income economies.
• This raises an important policy concern about
whether or not the young workforce is
underproductive, underpaid, or under qualified.
• Human capital investment continues to be
important to increase their productivity and the
economic growth
High Income Economies-Aging
• Increase of the economic dependency of the
young presents an important concern to
countries that are and will be experiencing labor
shortages and slowing labor force growth due to
the aging of their populations
• It poses a challenge to policy makers who must
design and implement a sustainable system to
reallocate resources from surplus producers to
dependent groups in the economy and to reduce
the dependency rates.
Middle Income Economies
• The tremendous increase of skilled labor is
also a challenge to create job opportunities
and prevent brain drain for middle-income
countries (e.g. Malaysia &Thailand)