The impact of education household head on household income the case of rural an giang province luận văn thạc sĩ

'·

UNIVER,SITY OF ECONOMICS
HO CHI MINH CITY

INSTITUTE OF SOCIAL STUDIES
THE HAGUE

VIETNAM

THE NETHERLANDS

VIETNAM- NETHERLANDS PROJECT FOR M.A. IN
DEVELOPMENTECONONUCS

THE IMPACT OF EDUCATION OF HOUSEHOLD ·
HEAD ON HOUSEHOLD INCOME: THE CASE OF
RURAL AN GIANG PROVINCE

BY

NGUYEN DUC THANG

ACADEMIC SUPERVISOR: MA. NGUYEN TID SONG AN

HO CHI MINH CITY MAY, 2002


CERTIFICATION

" I certify that the substance of this dissertation has not already been submitted for any degree

and is not being currently submitted for any other degree.
I certify that to the best of my knowledge any help received in preparing this dissertation, and
all sources used, have been acknowledged in this disssertation."

NGUYEN DUC TRANG
Date: .......................... .


ABSTRACT

People can be died by poverty which suffers from extremely low income to cover the
minimum needs in their lives, but no one died by lacking of education. Unfortunately, an
education level is a very important factor in comprising the income.
People with low education level will earn low income, therefore they easily drop in
vulnerable situation of poverty, hunger, or even crimes. The benefit of education has been
justified for times as a stimulating factor in income comprising through its effects on labour
productivity, technical efficiency, allocative efficiency, managerial skills and even change
one's perceptions or habits. Education therefore benefits anyone who attains it, no matter
the job they work and the sector they engage. On the other hand, with higher education
people are easier to work in many types of jobs, thus education also helps households
diversify their income sources, and hence makes their income become more stable.
An Giang province has a high rate of illiterate at 10%; and in the rural areas, 32%

households are living in the poor situations caused by the low income level. How to help
these households overcome their current situations is the big question for everyone who
concerns.
Of course, there are many reasons push the households into the poor status. One of main
reasons is low education level . This research aims to help people improve their life by
stimulating to increase their income through upgrading education, especially for formal
education.

Recognizing the benefits of education and knowing the important role of the household
head in household, this research tries to explore the relationship between household head's
education level and household income, and it is found that this relationship is positive.
From the results of this research, some policies will be suggested to increase household
income through the improvement of education factors.


CONTENTS
Page
CERTIFICATION

i

ABSTRACT

11

CONTENT

iii

LIST OF TABLE

iv

ACKNOWLEDGEMENTS

v

Chapterl. Introduction

1

1.1 Problem Statement

1

1.2 Objectives of the Thesis

3

1.3 Research questions and hypothesis

3

1.4 Methodology

3

1.5 Organization of the research

4

Chapter 2. Literature Review

5

2.1 Concepts and some broader issues of concerned

5

2.1.1 Household

5

2.1.2 Household head

6

2.1.3 Household income

8

2.1.4 Education

9

2.2 The role of education

10

2.2.1 Education and household income

10

2.2.1.1 Schooling and farm income

10

2.2.1.2 Schooling and non-farm income

13

2.2.2 Other benefits of education

15

2.3 Determinants ofhousehold income

17

2.4 The relationship between education and income

20

2.5 Empirical evidences

22

Summary ofliterature review

23

Chapter 3. Model Specification and data collection

24

3.1 Model Specification

24

3.2 Data collection

29
iii


3.2.1 The study area

29

3.2.2 Sample size

30

3.2.3 Sampling frame

31

3 .2.4 Questionaire conducting

31

3.2.5 Limitations of data

32

Chapter remark

32

Chapter 4. Research results and discussions

34

4.1 General characteristics

34

4.2 Household income

37

4.3 Education of household head

39

4.4 Relationship between household income and education

41

4.5 Results from econometric analysis

42

Chapter 5. Conclusions and suggestions

47

5.1 Conclusions

47

5.2 Policy implications

48

5.3 Limitations of the research and further study suggestions

49

lll


LISTS OF TABLES & FIGURES

Table No.

Table 2.1: Determinants of household income

19

Table 2.2: Summary of the effects of education on household income

21

Table 3.1: Variable presentation

25

Table 3.2.: Sample size

30

Table 4.1: Household characteristics

35

Table 4.2.: Other characteristics of household head

36

Table 4.3: Sources of household income

37

Table 4.4.: Income source between poor and non-poor households

38

Table 4.5: Crop activities

39

Table 4.6: Household head’s education

40

Table 4.7: Household head’s education in poor and non-poor households

40

Table 4.8: Quartile of education household head and income

41

Table 4.9.: The regression beíòre tests

43

Table 4.10: The regression after test

44

Figure No.:
Figure 1: Effects of education on farm production

12

Figure 2.: Effects of years of schooling on eamings

21

Figure 3.: Relationship between education level of household head on
household income 42


ABBREVIATION

ACR

: An Giang Committee Report

APAR : An Giang Poverty Alleviation Report
ASO

: An Giang Statistical Office

CSO

: Can Tho Statistical Office

HCEF : Human Capital Earnings Function
OLS

:Ordinary Least Square Estimation

VND :Vietnam's Unit Currency

iv


ACKNOWLEDGEMENTS

Firstly, I would like to express my appreciation and special thanks to my supervisor MA.
Nguyen Thi Song An for her valuable comments and instructions.
I am very grateful to teachers and staffs of Vietnam-Netherlands Project on Development
Economics. Many thanks are given to Project leaders, Dr Haroon Akram Lodhi and Mr. Tran
Vo Hung Son for their greatest support, Dr. Youdi Schipper, Dr Garbrielle and Mr Micheal
Palmer for their valuable comments, the secretary-Ms Nguyet and the librarian-Ms Chi for

their helps.
I am also very appreciate with helpful opinions and supports of all my friends, especially Mr.
Tai,.Mr. Dong, Mr. Hong and Ms. Phuong, who has given me a lot of supports in doing this
thesis.
I also send my thanks to people in An Giang province, local authorities and Woman Unions
from three communes Thanh My Tay, Vinh Thanh Trung and Thoai Giang, who have helped
me a lot in the process of doing survey.
Finally, I am indebted to my parents and relatives who have given me great encouragement
and support.

v


CHAPTER!

INTRODUCTION
1.1 PROBLEM STATEMENT

Everyone in everywhere all expects the enough life, but a living standard level is different across
countries. In one country, it also various from areas to areas, from urban to rural. Knight and Sabot
(1990) stated there is an inequality of income among households. Most people in rural areas are at the
low living standard level in comparison with other areas. In the rural areas, although no one, a
household wants to live in poor conditions of life, but a large amount of them do. They are not only
live in poor condition but also face to poverty situation which is only caused by the low income.
Vietnam is considered as one of the poorest countries in the world, with income level is just about
1USD per head per day, and 37,4% of population which are living in poverty (VLSS 98). Therefore,
the improvement of household income is very important for all households, especially for poor or
poverty households to escape the present bad situation.
Carney (1998) argued that chief asset posed by the poor was their own labor. Human capital refers to
the labor available to the household: its education, skills and health. On the other hand, Toulmin

(1992) stated that human capital could be increased by investment in education and training or by
getting the skills accumulated through the process of conducting their job with one or more
occupations. Modem theories of economic growth emphasized that the investment in human capital
will get the sustainable growth and invest in public education, health is macro policies (Cornia and
Jolly, 1987). The evidence about such expenditures fails to confirm the existence of a downward
trend in real terms as a general proposition for low income adjusting economics. (Sahn et al, 1996).
This means that there have many factors affect income, however education is the most important. In
the broader view, Molin (1970) argued that next to the capital, the investment in education
represented an important factor in economic development; a lack of knowledge and of skill will be a
major obstacle to efficient production and productivity in either the agricultural or industrial sector.
In the narrower view, Schultz (1964; 1975) proved that the education level affected farm productivity
by improving the quality of labor, by increasing the ability to manage and by implementing the tasks
on farm, as well as by the willingness to adopt innovations. As a result, education will lead to
increase productivity and hence income of households. While many theories and evidences support
for the benefit of education on income, many reverse results such as research ofRonnas (1992) reveal
the negative relationship between them. Therefore, empirical research about this relationship is
necessary to be examined in order to have the exact conclusion in a specific area.


Education contains all kinds of training and learning, in which the formal education is the most
important one for people (Colear, 1990). The benefits of formal education have been known for a
long time; Mincer (1974) stated the benefits of formal education on individual earnings; Basu,
Narayan and Ravallion (2000) showed the knowledge shared within household; Lucas (1998) proved
that education had benefits within village known as site effect; and as mentioned education can
benefit entire the country at national level (Molin, 1970). This means that education can benefit
people from individual, household, village to country level.
Lockheed, et al (1980) stated that there was a consistent conclusion on the impact of education levels
on total household income in the areas where farms were modernizing. In other words, education
level has a relationship with household income in rural areas which are engaged in farm activities.
As being stated in the chapter 2, in each household, the role of the household head is very important.

Household head is the decision-maker within the household about the production, the investment,
children's education and many other household activities. Household head is also the one who
connects the household to the outside.
In the South of Vietnam, An Giang is known as the largest paddy output and the highest productivity
provinces through times. Paddy productivity attains 5.3 tons/acre on average and output is 2.385 million
ton (ASO and CSO, 1998). However, it also is known as the highest population among Mekong Delta
provinces (ACR, 1999}, and as the abundance of labor force 49.95% population (ASO, 1999). The
quality of this labor force is poor in terms of education and of working skills, unskilled labor are at 96%
(AS0,1999). Although there is high literacy at 92.8%, the general education level of population is still
at low rate with 51.04% household head under primary graduation (ACR, 1999). In addition, the
number of poor households accounted for 38.841 households in 1996, the highest rate in Mekong Delta,
and this number absolutely increased year by year and reached 39,210 poor households by 2000
(APAR, 2000) which mainly dropped in rural areas.
The above general indices indicate that An Giang has high economic potential, but there have still many
households which are living below the poverty lin/. How to raise their household income is the big
question for all whom concern. While the benefit of education has been generally demonstrated, the
benefit of education of the household head- as the household decision-maker- to the household income
is not clearly explored, especially in rural areas. That is the reason why I choose the topic: the impact of
the education level of the household head on household income in rural An Giang.

1

In rnral area, the household has income per capita per month less than 100,000 VND was defined as poor household. In the urban area, the number is
I 50,000 VND. (Steering Committee ofHunger Eradication and Poverty Alleviation ofAn Giang province, 200 1). This definition coincide with the
definition of Vietnam.

2


1.2 OBJECTIVE OF THE THESIS

This research justifies the importance of the education level by examining the impact of formal
education of household head on household income in rural An Giang province by showing how
the change in each year of schooling of household head corresponding with the change in
household income is.
Besides, throughout the research, the income sources of households in rural An Giang will also
be explored in details. Based on these results, the research also tries to suggest some policies to
increase household income by stimulating the education level.

1.3 RESEARCH QUESTION AND RESEARCH HYPOTHESIS
To match the above objective, we will deal with the following research question:
•

Is there a positive relationship between total household income and the household head's
number of years of school attendance in rural An Giang Province?

And the hypothesis of the above research question is:
•

There is a positive relationship between total household income and the household head's
number of years of school attendance in rural An Giang Province.

1.4 RESEARCH METHODOLOGY
This research studies the relationship between household income and the education level of
household head, in which the household is the unit of this analysis. For that purpose we need not
to explore this relationship in individual level.
Both descriptive statistic and quantitative methods are used to answer the research questions.
The descriptive statistic method uses quartile analysis and the econometric analysis uses the
OLS model to examine the relationship between household income and the education level of
household head. In which the education level of household head proxies by number of years of
schooling attendance.

In the OLS model, the dependent variable is the total household income in 2000. In which, onfarm and off-farm engaged in agricultural sector or farm sector. Non-farm income was collected
by summing all income from outside agricultural sector. All independent variables will be
represented in Chapter 3. Primary data was collected from the survey by direct interviews with
household heads under the help of local authorities. Households were randomly selected from

3


available list also given by local authorities. Interviews were based on the questionnaire in the
appendix.
With the OLS model, the results will be interpreted after the normality, hetterocedasticity, and
multicollinearily tests. Besides the primary data, secondary and tertiary data used in this study are
collected from An Giang Statistical Office, and An Giang Report. This methodology will be
deeply presented in the Chapter 3.
1.5 ORGANIZATION OF THE RESEARCH:

This thesis concludes five Chapters as follow:
Following the introduction Chapter, chapter two contains related concepts and some issues
concerned. The role of formal education level will be highlighted as the important element in
household income. All sources of household income will be discussed to clearly understand the
structure of household income. Following this, we examine the determinants of household
income and then the relationship between education and household income. The final part in this
Chapter is about empirical evidences related to the research.
In the Chapter three, the first section specifies the OLS model used for the analysis; all variables
will be discussed to have expected signs. The second section discusses data collection by
reviewing the study area, calculating the sample size, constructing the sampling frame and
preparing the questionnaire for the survey. Finally, we will discuss limitations of the data.
Chapter four opens with descriptive section, in which we describe the demography
characteristics of the surveyed areas and of the households followed by household head. The
household income structure will be explored to understand their income diversification. We also

discuss the education of household head and finally we show the relationship between
household income and the education level of household head by quartile analysis. The second
section is econometrics analysis which quantitatively supports to the first section in answering
the research question.
Chapter 5 summarizes all main and sub-findings from the research. Based on these results, we
suggest some policies to raise the household income through education elements. The research
will be ended with the further study suggestions.

4


CHAPTER2
LITERATURE REVIEW
This chapter provides an introduction of the theoretical review for the study. Section 2.1 first
reviews and also discusses some relevant concepts. Section 2.2 states the role and the benefit of
education. Section 2.3 explores the determinants of household income, in which education level
is the one of determinants. From the Section 2.2 and 2.3, we can know that the education is one
of important factors that affects the household income, the Section 2.4 is about the relationship
between education and household income in various aspects and theories. Section 2.5 shows
some empirical evidences that relevant to this research. The final section is the summary of
literature review.
2.1 CONCEPTS AND SOME BROADER ISSUES OF CONCERN:
2.1.1 Household
Household is the group of persons who share the same abode or house, those people are sharing
and identifying the same decision-making unit which sets the strategy concerning the generation
of income, and using of this income for consumption and reproduction (Sadoulet and de Janvry,
1995).
According to Ellis (1993), based on characteristics and income generating activitiei of
household, we can distinguish two kinds of household: farm household and non-farm
household. Farm household derives their livelihood predominantly from the agricultural

production, and farm household can engage to other non-farm activities.
VLSS (1998) defined that farm household was the household that had all or almost laborers
working in agriculture and that got their income mainly from the agricultural production.
Therefore, farm household can be understood as a household derived its livelihood3 mainly from
agricultural production, or from their majorities of household labor force engaged in agricultural
production. Otherwise, it is the non-farm household.
In Vietnam, farm household has major labor force engaging m agricultural activities or
agricultural production determinant in their livelihood (VLSS 98). However, it is necessary to

2

This term was used by Fafchamps and Quisumbing (1998), it means income earning activities (Ellis, 2000)
Champers and Conway (1992) defined likelihood as "comprises the capabilities, assets (stores, resources, claims and access) and activities
required for a means of living". Or "A likelihood comprises the assets (natural, physical, human, financial and social capital), the activities,
and the access to these (mediated by institutions and social relations) that together determine the living gained by the individual or household"
(Ellis, 2000)
3

5


explain why I choose household not individual for my study as being presented in the following
part.
In developed countries, most workers are wage earners; hence the return to education can be
measured by examining the impacts of individual's school attainment on that individual's wage.
This means we can evaluate the effects of schooling at the individual level. However, in the
predominant feature of many developing countries, the largest share of household income is
generated from self-employed activities, so the household income is therefore suitable to be
measured at the household level (Jolliffe, 1998).
On the other hand, as stated many households and individuals are engaged in one or more than

sources of income generating activity, hence the estimation of return to education by focusing
on either strictly farm income, off-farm income or non-farm income including wage income will
provide an incomplete picture of the importance of education. For this reason, this research will
choose total household income to examine for highlight the role of education. Of course, the
effects of education on each type of household income are different, however this will not be
covered in the scope of this research.
2.1.2 Household Head

"Every household has a head" (Weir, 1999: p23). However, the concept of household head is

different across cultures and across surveys. In Ghana, for instance, the household head
classified does not base on educated attainment, management skills or other characteristics but
on age (Jolliffe, 1998: p5). However, Jolliffe (1998) supposed that the household head has been
the person who acted as a household manager, making all of decisions in the household.
In Vietnam, local authorities calls household head with a name "chu ho "4, it means that

household head is the person who presents for all household members in the resident book
managed by local government, and in almost Vietnamese households they also are the household
decision makers and represent for all members in the household when contact with the local
government.
"Most household surveys conducted in developing countries define one person as the head of the
household ... in case of Vietnam, defining one person as the head of the household is not unreasonable.
Administrative procedures require the registration of one person as the head of the household, but
definition of one person as the head goes deeper than current administrative requirements. It can be
traced to the influence of Confucian philosophy, which not only specifies a hierarchical structure for

4

'chu ho ' is the household head defined according to local government.

6


different types of inter-personal relationships, but also clearly defines the position of individuals within
each relationship ... "Desai (1995: pJO)

Household head is the concept and is not fixed for all studies; therefore, this is not covered in
theories but in the empirical contexts. This part tries to describe the role of household head by
discussing whose education in the household has the most important effect to the household
base on empirical studies. When examining the education level of household, many indicators
are possible to use for proxy. For example, Jamison and Lau's (1982) surveyed in over 35
studies from Asia, Africa, and Latin America, they argued that only the education of household
head affects to farm household income, while the education level of other household members
had no effect. Similarly, Fane (1975), Wu (1977) and Jamison (1984) also used education of
household head to represent for household school attainment.
By arguing that the spouse of household head is also a important person who influences
indirectly on household making-decision, or sometimes this spouse is the decision-maker,
Huffman (1974) used both education of household head and of the spouse to proxy for the entire
household; while Lin (1991) used both household head and average household education. 5
Household head's education level and occupation can affect both farm and non-farm incomes.
D.T. Nguyen (1999) asserted that the household head contributed to farm activities mainly by
gathering information, planning, production decision making and these are more important than
the time they spent on the farm. Fafchamps (1998) justified that the household head had more
decision-making power than other household members did.
When analyzing the Viet Nam economy in transition stage namely 'Doi moi 6 ', Moock (1998)
divided household head's education level into many

subgroup~

and examined them; he found

that 13,4% of the population in which household heads with university degree were poor in
1992-1993, but by the year 1997-1998 this rate downed to 4.5%. The number of household with
heads who attained technical school also downed from 47.7% to 19.2%. In contrast, majorities
of households with the non-educated head were still living in poverty because of this rate was
just downed from 69.9% to 57.3%. Those evidences showed that education level of household
head play an important role in poverty reduction in household.
Basu and Foster (1998) argued that only one person expected to be educated in the household
for the entire household to benefit from the cognitive skill/ acquired in school, and he suggested

5

Fane and Huffman studied in US household, Jaminson in Nepal, Wu in Taiwan and Lin in China cases
'Doi moi' was the transition stage from central-planned to oriented-market economy since 1986.
7
'Cognitive skills' refers to numeracy and literacy brought from formal education (Weir, 1999: p15)

6

7


that it was better to use education level of the most important household member to proxy for
the entire household education.
From the above discussion, the household education level can be affected by all household
members with the various impacts, however the household head education level is the most
important and can not be separated from effecting elements.
2.1.3 Household lncome8

Income is the earnings come from labor work after the period of time or from the transfer. These

sources of income are the returns from investment, farm production, or from service supply.
Income can be in-cash or in-kind. In-cash income is measured by money comprised from sold
livestock and crop, from wage, rents, or from remittances. In-kind income is the physical
products of the return referring to the consumption of own-farm product, payment in-kind, and
transfers or the exchanges of consumption items. (Ellis, 2000)
Household income contains all income from household members. There are many ways to
divide the household income into each sub-categories of income source or activities that
generates them (Ellis, 2000). However, the basic classification divided it into three kinds of
income (Saith, 1992; Leones and Feldman, 1998; Ellis, 2000):
•

On-farm income includes crops, livestock income and comprises both consumption inkind of own-farm output as well as cash income earned from output sold which is a net
amount that excluded all costs of production.

•

Off- farm income refers to wage or exchange labor on other farms.

On-farm and off-farm income refers to the income generating activities from the agricultural
sector. On-farm and off-farm can be combined to have farm income.
•

Non-farm income relates to non-agricultural resources, these are:
(1) Non-farm rural wage or salary employment;
(2) Non-farm rural self-employment, sometimes called business income;
(3) Rental income obtain from land or property;
(4) Urban to rural remittances arising from within national boundaries
(5) Other urban transfers to rural households, for example pension payment to retirees;
(6) International remittances arising from cross-border and oversea migration;

8

also calls total household income.

8


2.1.4 Education

Education, as the definition of Gillis et a! (1996) can broadly be defined as all forms of human
learning or more narrowly as the process that occurs in specialized institution called "school".
Education is classified into three types: formal education takes place in schools and usually
involves young people who have not yet started their working lives; informal education takes
place outside any institutional framework or organizes program at home, on the job or in the
community; non-formal education takes place outside schools whose attendants are often adults.
Its programs are usually shorter and more narrowly focused and more concerned with an applied
knowledge than the programs of formal education are.
Cotlear (1990) also describes education as three types: formal education is closely understand as
the term schooling; Non-formal education included all knowledge getting from various
extensions, apprenticeships and literacy training; Informal education refers to wide range of
experience, 'learning by doing' or other activities which create new ideas and facilitate learning.
"In VietNam, formal education begin with grade 1 and six-year olds should be in grade 1, seven-year
olds in grade 2, etc. Primmy schooling stretches from grade 1 to grade 5, so that a child who is on target
should complete primary schooling by age 10. Similarly lower secondary schooling grade are 6 to 9 and if
children are on target they should complete lower secondary schooling by age 14. After this point,
individuals can switch to vocational training or go on to upper secondary schooling which consists of
grades 10 through 12.

If they choose the latter track they should complete general schooling by age 17.

Those who move to the vocational track after lower secondary schooling spend three years obtaining
vocational training. Beyond upper secondary schooling there is technical training, university, etc. "
(Desai, 1995)

In rural An Giang, the definition of Cotlear is more appropriate in comparison with Gillis's
definition because people can work after the time in schooling. Therefore, throughout this
research we follow the definition of Cotlear. Moreover, in An Giang, with very weak nonformal educational system, there is almost no program such as agricultural extension ... which is
opened for people to upgrade their knowledge. All people who have to leave school seem to be
finished their education. Therefore, non-formal education is not needed to examine at this area.
In addition, when examining the case of Vietnam, Desai (1995) stated "ordinarily schooling

attainment should imply what individuals gain from formal schooling. " This means that the
formal education is very important to reflect the schooling attainment. This research will strictly
focus onformal education 9.

9

From here, the term 'education' can be understood as 'formal education'

9


Two types of education will be examined in this research are formal and informal education.
However, formal education is strictly focused, informal education will be examined as other
determinants.
As defined, formal education is reflected by schooling attainment or education level. This
education level can be measured by number of years of school attendance. Informal education is
accumulated from the time that people have done that type of work, and can be measured by
years of experience.
2.2 THE ROLE OF EDUCATION

2.2.1 Education and Household Income
To point out the benefits of education in term of earnings, several aspects of schooling benefits
will be mentioned. In which, education helps farmers conduct their own farm more efficiently and
adapt to technical change, education thus affects productivity. As the result, it leads to raise the
farm household income included on-farm and off-farm (as stated). For non-farm workers,
schooling benefits them directly through higher income.
2.2.1.1 Schooling and farm income

For people who live in rural areas, one main source of their income is farm income (Ellis, 2000).
To justify that education has an impmiant influence on farm income, we should firstly focus on
the relationship between farm production and education. Moreover, efficiency and productivity
are the keys to determine the output besides other factors in farm production.
•

Education and Technical and A/locative Efficiency in Agriculture

According to Weir (1999), the skills and the knowledge required to adapt to new technology are
scarce in developing countries; a learning process is therefore necessary. This learning process
is formed through farmer's experience and education, which includes three factors: the
experience from the production, the knowledge about capital and equipment, and know-how
regarding to experiment action. Weir (1999) concluded thatformal schooling might reduce the
cost of acquiring such know-how, thereby facilitating the adoption of innovations.

Education is always necessary for farmer because education enhances farm productivity by
improving quality of labor, by increasing ability to adjust disequillibria and by the willingness to
adopt innovation (Schultz, 1964; 1975). Croppenstedt et al (1998) conducted a fertilizer
marketing survey and found that literate farmers were more likely to adopt use of fertilizer than
illiterate ones did.
10

Psacharopoulos and Woodhall (1985) stated four stages of agricultural technology adoption.
The first stage, traditional farming, little or no schooling is necessary because farmers can
obtain information from their parents. The second stage, single input adoption, basic literacy
and numeracy are needed to understand the constructions. The third stage, adoption of multiple

inputs simultaneously, higher numeracy and literacy is required because it requires some basic
science knowledge. The final stage, irrigation based farming, more education is required due to
some complex calculations happened.
On the other hand, education help people increase the willingness to adopt technology, people
with higher education have intention to need more information from agricultural extension to
conduct trial test on their farms, for instance new inputs, crops or methods. (Weir, 1999)

•

Education and Productivity

As mentioned, in rural area, farm-income is a main source of household income. To get high
farm income, beside external factors such as: high output price and low input prices, the most
important factor that strongly affects profit is productivity. Higher productivity household will
bring higher farm income. To examine the effect of education on household income, we can
examine the effect of education on farm income through agricultural productivity.
Chraudhri (1979) stated four effects of schooling: worker10, allocative, innovative and external
effects. These effects help to raise productivity for farmers. Similarly, Welch (1970) said that
holding other inputs constant, the effects of schooling would increase the farm output. The
expected benefits of education come from the evidences that showed higher education leads to
higher productivity in agricultural areas and higher wages in non-agricultural areas. (Weir, 1999)
Many economists believe that farmer education is more important for modem agricultural
practices than for traditional ones. "Increasing literacy and numeracy may help farmers to

acquire and understand information and to calculate appropriate input quantities in a
modernizing or rapidly changing environment" (Weir, 1999: p4) and schooling helps people
learn on-the-job more efficiently (Rosenzweig, 1995)
Mellor (1976) asserted that farmer education in rural areas should be a central ingredient of any
strategy to improve agricultural productivity, and this productivity will again raise total
household income through higher farm income. Farm efficiency depends on the education level
of household head, which makes almost the farm decisions. To make good decisions in using

10
'Worker effect' ofschooling refers to the increase in farm output that is owing directly to education, holding other inputs constant (Chaudhri,
1979 and Welch, 1970)

11


new seeds in modernizing environment farmers are necessary to know how to read the
instructions for the use of chemical pesticides, fertilizers, etc.
It can be shown the benefits of education on farm income through farm production by the
improvement of technical efficiency, allocative efficiency and productivity by the following
figure.
OutputY

Hz

I

Figure I: Effects of education on farm production

Y=f(Xz)

Input X

Source: Hussain and Byerlee (1995)

In Figure 1, suppose that farmer without knowledge of technical and allocative efficiency started
at point B. The movement from B to T represents the achievement of technical efficiency. The
movement from T to A represents the allocative efficient and the shift of production frontier
corresponding with the shift from point A to I represents the applying of new technology to get
higher increase in output and profit.
In brief, by this figure, we can see that when two farmers uses similar amounts of inputs, the
output can be different base on their efficiency when using these inputs. In other explanation,
with the same inputs, depending on efficiency, one can get different output by enhancing their
knowledge of effective production frontier (Jamison and Lau, 1982).
From above discussions, we can conclude that the education level affects strongly to technical
efficiency and productivity. The raises to technical efficiency and productivity surely help to

12


increasing the farm output and hence the farm income. Finally, we can conclude that the higher
formal education will lead to higher farm income.

2.2.1.2 Schooling and non-farm income
Productivity of laborers is different from one another because they have different education,
health and working skills. Education affects labor power and hence wage. On the other hand,
education also helps labors find other opportunities to get additional income. Laborers who have
knowledge can use modem machines and learn new technology better than the less educated
people, and they therefore get higher salaries or wages from employers. (Schultz, 1993).
Education is an important determinant of earnings in the market economy. The higher one's
education is the higher starting salary and the steeper the rise in earnings during the working life

(Moock et al, 1998).
Evans (1991) concluded that in self-employment, people who had higher education levels were
better to be able to secure employment elsewhere, or succeed in business. Knight and Sabot
(1987) also showed that the number of years of schooling was an important element of cognitive
skills and those cognitive skills were again an important determinant of wages.
Moreover, educated farmers are able to interact more effectively with credit agencies because
they can understand financial transactions and can keep records, and hence increase the
likelihood of obtaining credit. Consequently, the education level of household head brings more
earnings in both farm and non-fmm income (Mellor,1976).
To understand clearly the benefit of education on income in the non-farm sector, we study the
two following models.
•

The two-period models

Willis (1986) proposed the two-period models of the demand for formal education being
presented as follows:
Assume that at the beginning of period 1, a person's stock of human capital is at level HC1, and
his earning capacity is w 1 per hour. After investing ts hours in schooling, a person's stock of
human capital increase to HC2

.

The increase in human capital is MIC(ts, A), with A is

exogenous variable. So, at the beginning of the second period the stock of human capital
become:
(2.1)

13

Suppose there is no depreciation of human capital, but by time and with speed of technological
changing, it will lead to reduce the values of old skills. Calling the rate of deteriorates is 8, with
(0<8<1). So the amount of human capital decreasing is (1-8) HC 1.
Therefore, the person's stock of human capital at beginning period 2 is:

HCz = (1-8) HC1 + LlliC(t5 , A)

(2.2)

Suppose the earnings in period 2 is w2 , from equation 2.2 we have:
Wz

(HCz) = Wz (ts, HC1. 8, A)

(2.3)

IfHC1. 8 and A are exogenous, w2 is only affected by t5, the time spent on education.
So the relationship between w 2 and schooling time t 5 and ability A as follow:
(2.4)

wz= h(ts, A)

Based on above equations, Willis, (1986) stated:

8w2 O· fiw2
8w2 0
-->
-2 < 0 -->

at s

' at s

'

aA

(2.5)

From 2.5 we can see that the earnings w2 increase in comparison with WI after spending the t5 on
education. This means that education level affect positively non-farm income.

•

The Human Capital Earnings Function (HCEF)

According to Chiswick (1997) "Human Capital Earnings Function has become a fundamental

tool in research on earnings, wages and incomes in developed and developing economies". He
proposed the model as follow:
The model will focus only on formal education which is proxies by years of schooling, ignoring
on-the-job training and other variables. In one period of investment in schooling, earnings after
completing the schooling is:

In which:
E0 : Earnings from no schooling attainment
E1 : Earnings received each years after completing t years of schooling
C1 : Cost of investment in year t of schooling

R1 : Rate of return on investments in year t of schooling
14


K 1 =C/T1_1 : Potential earnings after completing t years of schooling, in which T expressed the time one's consumed
to study and (t-1) is the previous point of time compare to point of timet.

Suppose that there are two points of time, note by 1 and 2. We have the two periods of
investment in schooling.
And the two periods of investment in schooling is:

Base on this equation, we expand for t periods (attainted S years of schooling), (2. 7) becomes:
s

Es =Eo

IT (1 + rtKt)

(2.8)

t=l

Where S is the number of years of schooling completed. Take natural logarithm, the equation
(2.8) becomes:
s

(2.9)

LnE 8 =LnE 0 + IJLn(l+r1K 1 )
t=l

IfrtKt is small, the Ln(1 + rtKt)

~

(1 + rtKt). The equation (2.9) becomes:

s

LnEs = LnE 0 + ~)r1 K 1 )

(2.10)

t=l

Assume during t periods, rand K do not vary (ro = rt and Ko =Kt for all t), then (2.10) becomes:
(2.11)
The equation (2.11) shows that eammgs will rise after one obtained additional years of
schooling. Based on above justification of Chiswick (1997), we can conclude that the
relationship between education level and non-farm income is positive.
2.2.2 Other benefits of education
Education helps people understand more about the world get higher utility from things they
consume, as well as provide them the knowledge to absorb information relating to their
production. Therefore, "improved rural education would yield numerous important social,

economic and human welfare benefits other than the productivity gain in agriculture" (Nguyen
and Cheng, 1999)
In addition, according to Knight and Sabot (1990), economic inequality is from an inequality
among individuals, inequality in the lifetime income of individuals and inequality of
15

opportunities. From these points of view, economic inequality relates to income distribution
between individuals and households. Therefore, to reduce this inequality gap, income must be
improved for those individuals and households at the low-income level, and education is one of
factors that make this gap shorter. Educational expansion has a strongly effect on the
distribution of the current income. As mentioned, education plays a main role in the increase of
income at both individual and the household level.
Kooreman (1996: p199) stated the two concepts 'poverty' and 'income distribution' are closely
related, because of poverty refers to a particular state of well being which is wider than income.
However, to research the poverty state, it is very common to use income to measure state of well
being. And one more reason is that redistribution is the primary instrument for poverty relieving
policies. From this, we see that to reduce poverty, the compulsory solution is to increase income
for people.
Besides, it is easy to obtain that the higher education attainment helps reduce crimes, reduce
population rate, that are also positive effects of education on society.
• Formal education associated with informal education

As defined, experience is the element of informal education. This section will show benefit of
formal education while associate with experience. The HCEF has been presented; however, to
understand clearly the role of education when associate with experience years in earnings, we
refer to the revised HCEF11 (Mincer 1974). This model shows the relationship between schooling,
experience and individual earnings.

where:
Y: annual earnings
ts: years of formal education
tw : years of experience
when w;=O, the starting point at level

(f3 0 + f3 1ts), only concluding formal education.

The HCEF indicate that the tendency for earnings-experience profile to be steeper for more
educated people. This also means education level consolidate with experience in creating the
income. (Knight and Sabot, 1990).

16


• External effects of education

An externality arises if those people without schooling copy the adoption behavior and
productive practices of educated. Hence, Nguyen (1999) argued that an increase in agricultural
production requires a modernizing environment with more complex technology in which farmer
education plays a crucial role and farmers with more education are more favorable than the less
educated ones. Bmjas (1995) postulated and tested the external effect12 of education. In his
research, human capital is passed from one generation to the next through the community. This
means in one household the human capital is passed not only from their parents but also through
the average human capital of ethnic group in the parent's generation.
To test the external effect of education, Lucas (1988) added average levels of primary and
secondary schooling of other farmer at village into his equation; the results of external effect are
found significant.
According to Weir (1999), education is expected two effects: internal effect and external effect,
these two effects should be distinct, internal effect is return to schooling at household level, and
external effect is return to schooling at site level13.
Empirical studies of Lucas (1988) devoted that external effect was the main factor in success of
raising the productivity for uneducated farmers who contacted with educated one. Especially in
rural areas, because the less educated can copy the innovative behavior of more educated
households, and the effect of education at site level occurs when the less educated households
live near higher educated households. Many researchers had shown that education has external

effects by adding average levels of primary and secondary schooling of other farmers in the
village to their equation, and getting the positive result.
However, not only the education causes the external effects, but also experience does. Foster
and Rosenzweig (1995) showed the external returns to experience in India case.
2.3 DETERMINANTS OF HOUSEHOLD INCOME

To study the determinants of household income, Strauss (1986) supposed that household income
includes farm and non-farm income. This is only another way to comprise the household
income. In comparison with household income source classification of this research, it means
on-farm, off-farm and non-farm income.
11

Mook(1998:p5)
External effect refers to social benefits of schooling, while internal effect refers to private benefits of schooling. External effect occur when
uneducated learned the experiences ofeducated. (Weir, 1999)

12

13

"Site level" was considered as the village which the households are living (Weir, 1999: p37)

-........
l 1\tJCreG ~~~ li'UC I\ I~Ill T{ I

I
t~.t.~L~-~~~~:~-~~!~ D'}~~-~-9.9
1LI~~:!!.~iC'i' tiO 2Hi .f..~!-~_1-1

17