Does Doing an Apprenticeship Pay Off? Evidence from Ghana

 

CSAE WPS/2008-08

 

Does Doing an Apprenticeship Pay Off? Evidence from Ghana      

Courtney Monk, Justin Sandefur and Francis Teal Centre for the Study of African Economies Department of Economics University of Oxford

†

   

February 2008 Abstract In Ghana there is a highly developed apprenticeship system where young men and women undertake sector-specific private training, which yields skills used primarily in the informal sector. In this paper we use a 2006 urban based household survey with detailed questions on the background, training and earnings of workers in both wage and self-employment to ask whether apprenticeship pays off. We show that apprenticeship is by far the most important institution providing training and is undertaken primarily by those with junior high school or lower levels of education. The summary statistics indicate that those who have done an apprenticeship earn much less than those who have not. This suggests that endogenous selection into the apprenticeship system is important, and we take several measures to address this issue. We find a significant amount of heterogeneity in the returns to apprenticeship across education. Our most conservative estimates imply that for currently employed people, who did apprenticeships but have no formal education, the training increases their earnings by 50%. However this declines as education levels rise. We argue that our results are consistent with those who enter apprenticeship with no education having higher ability than those who enter with more education.

  Keywords: Apprenticeship; Africa; Training; Treatment; Control function JEL  Classification Codes: O12; J24

 

     

*

The data used in this paper were collected by the Centre for the Study of African Economies (CSAE), Oxford, in collaboration with the Ghana Statistical Office (GSO) in 2006. The survey was funded in part by the Department for International Development (DfID) of the UK as part of its work on assessing the outcomes of education and the Economic and Social Research Council (ESRC) as part of the Global Poverty Research Group. We are indebted to the International Development Research Centre (IDRC), Canada, for support for this work which is being undertaken as part of the program of work on ‘Improving Labour Market Outcomes for the Poor: Can globalisation create better jobs?’. We have been assisted by numerous collaborators in enabling us to collect this data. We are also greatly indebted to Moses Awoonor-Williams, Geeta Kingdon and Andrew Zeitlin for their assistance in the design and implementation of the survey. We would also like to thank seminar participants in Oxford and Cambridge, especially Christopher Colclough and Geeta Kingdon, who provided very helpful comments on an earlier draft. The data used in this paper, a STATA do file to recreate the main results and a Word document summarizing the variable names can be found at: http://www.csae.ox.ac.uk/datasets/main.html. †

Corresponding author: [email protected]; Economics Department, Manor Road Building, Manor Road, Oxford OX1 3UQ, United Kingdom; Tel: +44 (0)1865 271077.

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Introduction

Skills training in Ghana occurs in both the private and public sectors. By far the most important institution which provides such training in the private sector is the traditional apprenticeship system. Apprentices are young men and women who undertake highly sector-specific training. Some of these apprentices then go on to form their own businesses, others go on to work in the firm in which they were apprentices as masters/mistresses, some move to other firms or occupations. While much is known about the institution in terms of its structures and forms, we know much less about how well apprenticeship pays relative to other forms of training and relative to more academic education. Given the prevalence of apprenticeships, we believe that improving our knowledge about the returns to such training is very important. Moreover, in light of the rise in the importance of the informal sector in providing job opportunities in urban areas (Kingdon, Sandefur, & Teal, 2006), and the accompanying dominance of apprenticeship as the training option in this sector, the questions regarding the size of the returns to apprenticeship are all the more relevant.1 We attempt to fill the gap in the literature by focusing here explicitly on apprenticeships. We begin by speculating about the underlying dimensions of apprenticeship training, both economic and social. The economic consequences from doing an apprenticeship are twofold: apprenticeships raise one’s potential earnings and also improve one’s chances of having a job. In addition, apprenticeship is a social as well as an economic undertaking for many young Ghanaians. As apprentices, young people mature while developing job-oriented skills. In this paper we focus exclusively on the effect of apprenticeships on earnings for those people who report an earned income. We abstract from the issue of labour market participation. Rather, we are choosing to compare two similar groups: income earners who have not invested in apprenticeship training and income earners who have. Therefore our research question is 1

While we address questions specific to Ghanaian apprenticeship, the analysis links to the long history in Ghana, and elsewhere, of the relative value of academic relative to vocational education (Foster, 1965a, 1965b) and to the policy debate as to how public provision compares with the private provision of training (Middleton, Ziderman, & van Adams, 1993).

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very specific: does apprenticeship pay for those who have earned income? Measuring these economic returns to apprenticeship is a difficult undertaking for three reasons. First, the data requirements are quite important; as Frazer (2006) argues, apprenticeship is most commonly a form of skill acquisition which pays off in self-employment if the apprentice acquires sufficient capital to start their own business. Thus to establish the effect of apprenticeship it is essential to observe individuals in both the wage and self-employment sectors. We use data from the CSAE/GSO’s Ghana Urban Panel Household Survey (GUPHS) that includes detailed information on training for individuals and measures the incomes of the self-employed with as much accuracy as possible in a manner that allows incomes to be compared across the formal and informal sectors. Secondly, the endogeneity of education caused by omitted unobservables must be addressed. We use a control function approach (in the first stage) in order to have a flexible functional form in the earnings equation. In addition, we are interested in the interplay between education and apprenticeship and must explicitly allow for the potential importance of the returns to education being convex. Finally, we deal with the endogeneity issues surrounding apprenticeship inherent in our nonexperimental data. The main reason why endogeneity would be an issue is an omitted variables problem due to ability: people who are more able are more likely to earn a high return from apprenticeship and earn a high income. Alternatively it may be true that less able people choose apprenticeship over education more often than high ability people, or less able individuals have difficulty finding jobs and therefore go into an apprenticeship. We control for ability by including scores on skills tests and the score on the Raven’s test. An additional source of endogeneity may be a specific “aptitude for apprenticing” which makes certain individuals benefit much more from this type of training than others. To address endogeneity caused by ability bias (that remains unobservable after the Raven’s test) and this so-called aptitude bias, we also pursue an instrumenting strategy, using a treatment effects (IV) approach as well as a control function in the first stage. The control function offers the advantage over the IV that allows for 3

heterogeneity across the education spectrum, which proves to be crucial here. In the next section, we assess how important apprenticeship is as a form of training in order to motivate the need for this analysis. In Section 3 we describe the relationship between education and apprenticeship choices. Section 4 describes the data, and Section 5 discusses modeling issues. Section 6 presents the results and argues that the payoff from being an apprentice depends on the education level at which it is undertaken. In Section 7, we present an internal rate of return analysis. A final section concludes.

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How important is apprenticeship as a form of training?

We begin by establishing the importance of apprenticeship in Ghana.2 We draw on the 1984 and 2000 Ghanaian Censuses, the Ghana Living Standards Survey 4 (GLSS 4), and our own data to argue that apprenticeship is a key form of training. It is common among workers in all sectors but especially among urban workers in the informal sector. Table 1: Manufacturing Employment in the Population Census 1984

2000

Empl.

Share

Empl.

Share

Growth Rate

Wage Employees Public Private Apprentices Other Total Employed

27,172 65,931 25,332 18,684 137,119

4.6 11.2 4.3 3.2 23.3

34,275 100,174 78,834 15,873 229,156

4.3 12.7 10.0 2.0 29.1

1.5 2.6 7.1 -1.0 3.2

Self-Employed Without Employees With Employees Total Self-Employed

430,029 21,270 451,299

73.1 3.6 76.7

490,276 68,636 558,912

62.2 8.7 70.9

0.8 7.3 1.3

Total

588,418

100.0

788,068

100.0

1.8

Source: Author’s calculations based on published statistics from the Ghana Statistical Service census reports (Ghana Statistical Service, 1984, 2005).

As Table 1 shows, there has been a marked increase in the absolute number of (current) appren2 While there are several formal institutions that offer vocational training in Ghana, we focus here on traditional apprenticeships that take place in the enterprise itself.

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tices across the manufacturing sector in Ghana, and their portion of wage employees has also risen substantially from 1984 to 2000. It is likely that much of the increase in the number of people trained in apprenticeships has been absorbed by small firms and the self-employed. Table 2: Training among working age Ghanaians, 1998-99, GLSS 4 Urban No. Share Total Sample Current Apprentices Past Apprentices No Apprentice Training Total

364 1,008 3,472 4,844

No.

2.7 7.5 25.9 36.1

Rural Share

380 1,473 6,706 8,559

2.8 11.0 50.0 66.4

All No.

Share

744 2,481 10,178 13,403

5.6 18.5 75.9 100.0

Source: Author’s calculations based on the GLSS 4. Sample excludes those under age 15 and over age 65 and those who did not report apprenticeship status.

Table 2 shows summary statistics for the working age population—all people between ages 15 and 65, whether in or out of the labour force—from the GLSS 4. Apprentices make up nearly 25% of working-age Ghanaians and 28% of urban residents, assuming the GLSS is a nationally representative sample; this figure is even higher for the employed (figures not reported). Table 3: Training and Apprentices in Ghana, 2006, GUPHS

Apprentices No Formal Training Current Apprentices Past Apprentices Any Other Vocational/Technical Training Total

Training Events Current Apprentices Past Apprentices Current vocational trainees Past vocational trainees Current on-the-job trainees Past on-the-job trainees Trained teacher/nurse Total number of training events

No.

Share

1,078 122 317 126 1,643

65.6 7.4 19.3 7.7 100.0

122 317 16 112 40 158 25 790

15.4 40.1 2.0 14.2 5.1 20.0 3.2 100.0

Source: Author’s calculations based on the GUPHS. Total number of training events does not account for double counting, e.g. one person with vocational and apprenticeship training counts as two events.

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Within our sample of people aged from 15 to 65 from the GUPHS, including those both in and outside the labour force, 26.7% have done some form of training as an apprentice (see Table 3).3 In Table 3 we also identify both current and past training events of all types (vocational/technical, apprenticeship, on-the-job and teacher/nursing) in order to demonstrate that apprenticeship is by far the most common.4 Current apprenticeships account for 15% of the training events in the survey while past apprenticeships comprise 40%. The second most important form of training is that classified as on-the-job, followed by vocational training, excluding that for teachers and nurses, who constitute 3% of the training events.

2.1

Shortage of literature

We believe that we have now established the importance of apprenticeship as a form of skills training in Ghana. Yet there is a dearth of research on this topic. Most studies investigate the private and social returns to formal training in developing countries but there are few papers on apprenticeships specifically (as indicated in the literature review by Middleton et al. (1993)). Rosholm, Nielsen, and Dabalen (2007) find a 20% wage increase due to formal training in Kenya and Zambia. However, they focus only on training undertaken at formal vocational and technical institutions; apprenticeships are mentioned only briefly and are not explicitly studied. Using data from Ghana, Jones (2001) finds a statistically significant, large positive return to vocational training for wage earners when it is differentiated from formal education. Jones (2001) does not highlight this result in her paper, but the coefficient in her earnings equation is roughly .5, which, assuming her vocational variable is a dummy variable, would imply that workers with formal vocational training earn 65% more than those who do not, on average. As for apprenticeships, Grootaert (1988) finds a small and insignificant return to years of apprenticeship for urban residents and 17% increase in annual earnings from a year of appren3

This figure includes people who have also undertaken teaching and nursing training. Many individuals do more than one form of training. The ”training events” in Table 3 do not correct for double counting. 4

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ticeship for rural residents in Cˆ ote d’Ivoire, though apprenticeship is not treated as endogenous in the earnings equation. Mabawonku (1979), in contrast, found very high rates of return for apprenticeships in northern Nigeria. In a more recent paper, Frazer (2006) uses Ghanaian Manufacturing Enterprise Survey (GMES) and GLSS 4 data from the 1990s and presents earnings equations in which the return to apprenticeship is very low on average, though he assumes apprenticeship is exogenous. He finds with the GLSS 4 that wages rise by about 7% for those with apprenticeship training in his sample that includes all workers; wage earners earn only slightly more after doing an apprenticeship, though this is insignificant. However the return for the self-employed, who benefit most from apprenticeship in Frazer’s model, is much higher at 19% and is statistically significant. He also finds in the GMES data that wage employees in the manufacturing sector actually earn less if they have done apprenticeships. In assessing the returns to apprenticeships this literature currently has two limitations. First, nearly all of these papers look at the wage returns to training undertaken by those in wage employment. By measuring self-employment in a manner comparable to wage earners, our data (the 2006 GUPHS)allow us to assess the return in a more comprehensive and believable way. Second, there is a distinct lack of research treating the econometric issues of endogeneity of the apprenticeship decision. Our paper addresses both of these concerns.

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Educational background and occupational outcomes of the apprentices

In Table 4 we present the educational background of the individuals in the sample and for apprentices in order to asses how their educational patterns differ. Table 5 presents a similar breakdown for occupational outcomes. It is clear from Table 4 that by far the most common pattern for apprentices is to enter training after the end of junior high school, which under the old education system was the end of middle school. Of those individuals in the sample who had done an apprenticeship in the past, 74% entered at the junior high school level. However, it will prove to be of importance for the results 7

Table 4: Educational Background, 2006 No.

Share

Total Sample No education (years