This paper aims to investigate whether the conventional approach to estimating the private and social rates of return to education generates reliable findings when used in economies with chronically depressed labour markets.
Conventional techniques (the Mincer earnings function and the discounting method) are used to provide initial estimates of the private and social returns to education in Kosovo. However, this study argues that in countries with chronically depressed labour markets, such as in Kosovo, the conventional approach is likely to significantly underestimate the private and social returns from achieving a higher level of educational attainment. This study extends the estimation approach to take into account the greater probability of more highly educated Kosovars being: employed, employed in the formal and public sectors and having longer job tenure.
The extended approach to estimating rates of return to schooling generates higher private and social rates of return to education than the conventional approach. Moreover, in contrast to the findings of the conventional approach, the revised approach suggests that private and social rates of return are highest from completion of upper secondary and tertiary education.
The results indicate that if governments in economies with chronically depressed labour markets decide upon their educational priorities based on unadjusted rates of return, then resources may be misallocated.
The analysis presented in this paper suggests that conventional approaches to estimating private and social rates of return to education are not suitable for use in economies with chronically depressed labour markets. In addition, the paper provides the first comprehensive analysis of the rates of return to education in Kosovo. These results are used to provide a critique of the Kosovo Government’s recent educational priorities.
