School dropout and overeducation in developing economies: Feasibility of a budgetary solution†

• Published date: 01 May 2023
• Author: Sayoree Gooptu,Vivekananda Mukherjee
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/rode.12964

REGULAR ARTICLE

School dropout and overeducation in

developing economies: Feasibility of a

budgetary solution

†

Sayoree Gooptu

1

| Vivekananda Mukherjee

1,2

1

Department of Economics, Jadavpur

University, Kolkata, India

2

Department of Economics and Finance,

BITS Pilani, Hyderabad, India

Correspondence

Vivekananda Mukherjee, Department of

Economics and Finance, BITS Pilani,

Hyderabad 500078, India

Email: mukherjeevivek@hotmail.com

[Correction added on 21 December 2022,

after first online publication: The

affiliation of the first author has been

corrected in this version.]

Abstract

High rates of school dropout and overeducation are

typical problems faced by developing economies. This

paper addresses these issues in a unique theoretical

model that accounts for complementarity between

household and infrastructural investment in education

production function on the one hand, and school and

higher education on the other hand. The results

derived in this paper show that a reallocation of the

education budget in favor of school education can solve

both problems at the same time if certain conditions

are satisfied. Otherwise, reallocation aggravates the

problems. This paper questions the efficacy of the

widely practiced budget reallocation policy in favor of

school education, and in turn, shows that reallocation

cannot eliminate school dropouts.

KEYWORDS

budget reallocation, labour market, overeducation, school

dropout

JEL CLASSIFICATION

H52, I21, I28, J24

†

The paper has benefited from the comments it has received from two anonymous reviewers of the journal. It has also

benefited from its presentations at conferences held at Indira Gandhi Institute of Development Research, Jawaharlal

Nehru University, Presidency University, and Kalyani University. The suggestions from Achin Chakraborty, Joydeep

Bhattacharya, Saumen Chattopadhyay, Anirban Mukherjee, Shubhasish Gangopadhyay, Pradeep Kumar Choudhury,

Heinrich Ursprung, Arye Hillman, and Sugata Marjit on earlier versions of the paper were helpful. The usual disclaimer

applies.

Received: 10 September 2020 Revised: 10 October 2022 Accepted: 20 November 2022

DOI: 10.1111/rode.12964

Rev Dev Econ. 2023;27:825–852. wileyonlinelibrary.com/journal/rode © 2022 John Wiley & Sons Ltd. 825

1|INTRODUCTION

The United Nations Educational, Scientific and Cultural Organization (UNESCO, 2019) reports

that there were 258.4 million out-of-school children in the world in 2018. The scenario was the

worst in Sub-Saharan Africa (97.5 million) and South Asia (93 million).

1

At the same time,

according to International Labour Organization (ILO, 2020), around 258 million workers were

overeducated across 114 countries (from all regions and income levels across the world) in the

sense that their education level exceeds their job requirement.

2

In developing countries like

India, Roy Chowdhury, Bros, and Gooptu (2021) estimate that 66% of workers in the Indian

manufacturing sector are overeducated. Kukreja (2018) reports the education mismatch rate in

the Indian textile and clothing industry is 67.61%, which is much above the world average.

Owing to school dropouts, an economy faces a loss in labor productivity, national income, and

the high social return associated with school education (Levin, 1972; Rumberger, 1987). Simi-

larly, due to overeducation, an economy loses out because of the high opportunity costs associ-

ated with education expenditure.

The paper addresses the dual problem of the high rate of school dropouts and the high inci-

dence of overeducation, prevalent in developing countries, in a theoretical framework. The gov-

ernment being the most important financier of education in developing countries

(UNESCO, 2016), we study the role it can play in solving these problems. Assuming that the

government's objective is a reduction of both, the paper examines the feasibility of solving these

problems through the reallocation of its education budget, which is known for its bias in favor

of higher education.

3

Of late, although developing countries tried to achieve universal enroll-

ment in primary schools for fulfilling the UN's Millennium Development Goals, from the data

reported above it appears that the question of school dropout and overeducation have not

received sufficient attention. The paper finds the conditions under which the reallocation

instrument would achieve the above objective.

The paper models a single-child household's decision about the schooling and higher educa-

tion of its child. The model considers an educational production function that incorporates the

following features of a typical education process (Majumdar, 1983): (i) household and institu-

tional investments are complementary to each other in determining educational outcome;

(ii) path dependence in choice of educational investment at the higher level; and

(iii) interdependence between school and higher education outcomes. This approach acknowl-

edges that educational achievement depends not only on the ability of the child but also on the

investment in education made by the household and institutional investment provided by the

government, which comes in the form of the building of schools and colleges with all the rele-

vant facilities and recruitment of teachers.

4

School outcome has crucial implications for higher

education: the set of opportunities available at higher education depends on the irreversible

investment made at the school level. The quality of school education, on the other hand,

depends on the higher education outcome since schoolteachers are appointed from the higher

education system, which is emphasized in papers like Chetty, Friedman, and Rockoff (2014),

Aaronson, Barrow, and Sander (2007), and Azam and Kingdon (2014).

5

While deciding about

the allocation of its budget at different stages of education, the government considers these fea-

tures of education production function and internalizes it. In the theoretical literature, in papers

such as that of Arcalean and Schiopu (2009), though the production functions that capture the

complementarity between household and institutional investments in determining educational

outcome are considered, the interdependence between school and higher education outcomes

through teacher quality has not been addressed. On the contrary, papers like that of Gilpin and

826 GOOPTU AND MUKHERJEE