The human capital function for the Brazilian states: increasing or decreasing returns to education?

Abstract

The objective of this paper is to estimate human capital function for the Brazilian states. The rates of return are obtained by gender and states. For states that present increasing returns, the estimates also obtain the average year after which returns to education starts to increase (the threshold effect). The estimated empirical model has shown that in average the increasing returns starts at 4.8 years of education at aggregate level for Brazil. At the region level, South, Southeast and Center-West all states presented increasing returns to education while in the north region most of states show that the returns are constant. In the Northeast region only Alagoas presented constant returns to education. As general result the estimated theoretical model has shown that the returns to education starts normally between 4 and 5 years of education; however, the average rate of return for the first year of education (literacy) around 9,5% decreases very fast up to 5 years of education. This level is reached again only after almost concluding secondary education level. This major result may explain the high level of drop out in fundamental and secondary education level. The incentives for additional education may not be enough to overcome some potential existing hidden cost (not studied in this paper). As a general result, the theoretical model and its estimates indicates that the increasing returns originate from high level of education being attained by the individual, specially secondary and tertiary education. Thus an educational policy aimed at these levels will be a welcome one.