This paper tests for the sheepskin or diploma effects in the
rates of return to education in a developing country, Pakistan;
presumably the only study for me country that explicitly investigates
this important question. One reason forthis paucity of work may have
been lack of appropriate data on an individual's educational status. The
Mincerian log -linear specification of the earnings function is
generalized to allow for the possibility that the returns to education
increase discontinuously for the ~ears when diplomas/degrees are
awarded. This provision is made in three different ways, i.e., by (a)
introducing dummy variables for diploma years, (b) by specifying a
disoontinuous spline function, and (c) by specifying a step function.
Empirical evidence based on a nationally representative sample of male
earners shows that substantial and statistically significant sheepskin
effects exist at four important certification levels in Pakistan,
namely, Matric, Intennediate, Bachelor's, and Master's. This froding is
consistent with the screening rather than the convential human capital
view of the role of education. However, it should be noted that while
diplomas seem to matter, it is not true that only diplomas maUer; since
even after controlling for diploma years the schooling coefficient,
albeit smaller than before, is still substantial. Again, regarding the
diploma effects, another interesting froding is that such effects are
not significant in case of the Primary and the Middle levels of
schooling. In tenns of the policy implications, it follows that, in the
case of Pakistan, education is an important and significant influence on
the individual earnings. However, to the extent that the diploma effects
are significant, the potential for education as a source of enhancing
worker productivity is lessened, thus reducing the scope of an activist
public policy in this regard. This is particularly true for the
Secondary levels of education. In fact, the frodings suppon a
reallocation of the available public funds away from the teniary/higher
education and towards the basic education, where the productivity
enhancing human capital effects are relatively more apparent.