1. The Question
Indeed, education expansion in Kenya during the last twenty years can be considered really significant. Primary net enrollment increased from 80% to 92% in the period from 2003 to 2008, after introducing the Free Primary Education policy, and secondary net enrollment almost doubled in the same period due to 2008 introduction of Free Day Secondary Education policy. Today in Kenya more than 60,000 university graduates per year receive degrees from 79 universities. Standard human capital theory implies that such education expansion should result in an increase of productivity of workers and average wages.
Nevertheless, returns on such education levels that have been expanding, primary and secondary, decreased substantially in the given period, while youth unemployment (calculated differently but quite inconsistently in Kenyan labor statistics) remains high, and university graduates are mostly employed in the informal sector of the economy, rather than wage sector predicted by their qualifications. Thus, the question arises: why did Kenya’s substantial educational expansion fail to translate into broad-based wage growth, and what does the specific pattern, falling returns at lower levels, stable or rising returns at the university level, reveal about which theory of education
(human capital accumulation versus signaling) better explains Kenyan labor market outcomes?
2. The Microeconomic Mechanism
The two conflicting explanations for the positive effect of education on wages make differing predictions regarding what should occur as enrollment rises, and the evidence from Kenya allows for a crude comparison of the two.
The human capital view asserts that education creates skills directly, and therefore the higher the education, the higher the wage due to the fact that educated individuals are truly productive. According to this perspective, increasing enrollment levels will increase the stock of productive skills in the economy, and therefore wage returns for the same level of education will be reduced due to the law of diminishing returns but will not be greatly reduced unless the skills taught are worthless.
The signaling (or screening) view, according to the theory put forth by Spence, which is consistent with his classical model, education significantly increases wages since it is a means of differentiating between high ability and low ability individuals. This theory suggests that a credential’s wage benefit will be determined by its scarcity and its difficulty in attaining for individuals who have low abilities. This is because once a credential is achieved by almost everyone, it ceases to act as a tool for separating workers based on their abilities, and thus becomes unable to give a wage benefit.
The two theories make distinctly different predictions for the particular pattern that Kenya has followed, which is mass expansion of primary and secondary education (taking those credentials towards near-universal status) coupled with the ongoing shortage of university education completions. There is not much of a rationale on the part of the human capital theory to expect that the returns from primary and secondary education will suddenly plummet. However, the signaling theory will predict precisely this outcome, as the primary and secondary credentials approached universal status after the introduction of free education policy, their wage-premium would be expected to drop dramatically because of the lack of informational value in sorting people according to their abilities, while the university credential, being held by only a minority of the workforce, will maintain its signal value.
The third mechanism acts parallel to these two and is neither strictly included within either of them: labor demand absorption capacity. While an education system that really helps people gain skills and does not just send signals about them being skilled may not lead to high salaries if the formal part of the economy with formal wage-paying jobs does not generate sufficient vacancies for absorbing the increasing number of educated people.
3. Evidence
The differential-returns pattern matches the signaling prediction closely. Based on manufacturing wages in Kenya, returns to primary schooling dropped from around 10% in 1978 to about 2% in 1995, and returns to secondary schooling dropped from around 34% to about 12%, while there was no decline in the returns to higher education, which may even have increased. Another measure of the social return to secondary schooling reveals an even sharper drop, from around 20% in 1978 to 6% in 1995. This occurred prior to the free education program that took place in 2003/2008 but represents the same dynamics at work in the earlier expansion of schooling in Kenya’s educational history (the earlier expansion of schooling in the 1970s/80s).
Recent research finds a direct quality gap between schooling quantity and actual skill. In the 2024 PhD thesis based on the World Bank’s STEP household survey data on urban Kenya, “inefficiency in schooling” refers to the phenomenon in which individuals who have lower education levels often have higher reading levels and vice versa, suggesting that number of years spent in school is not a good predictor of ability in the labor market in Kenya. This is supported by complaints from employers and other Kenyan labor market studies in which graduates tend to be more qualified in a formal sense but lack work skills; several reasons behind this are identified as a focus on exam learning in school settings.
Formal-sector job creation has lagged far behind both enrollment growth and total job creation. The Kenyan economy added 848,200 jobs in 2023, yet an estimated 85 percent of them (that is, 720,900) were informal jobs in sectors like retailing, wholesaling, and hospitality, leaving just 127,300 for formal employment. In other words, almost all the people entering the job market every year, most of whom have attained either secondary or tertiary education, are now getting into a type of employment that does not provide them any premium based on their credentials. Thus, the absorption of demand mechanism holds good here: a highly educated new entrant to the job market will find himself in a formal labor market where there is very little space for him.
Youth and graduate unemployment estimates are high but notably inconsistent across sources, itself informative. There have been reports from different Kenyan and global sources that have shown youth unemployment rates ranging between 20% and 67%, based on the age bracket, year, and the type of unemployment, open unemployment or underemployment, being reported. However, despite debate over the actual figure, all sources have agreed on the general trend of employment and underemployment trends that have been experienced by the younger, recently schooled populace, which education reforms were designed to help.
4. Argument
The facts point clearly towards a combined view as opposed to any single-factor explanation. The distinctive pattern of returns, declining for primary and secondary level, constant or increasing for university level, cannot be explained by any pure human capital theory, given that there is nothing to suggest real skill content of education at the primary and secondary level has worsened so dramatically compared to university-level education over the decades covered; but it fits precisely into the predictions of the signaling model once a credential ceases being a rare and becomes an almost universal possession. Meanwhile, the result regarding “inefficiency in schooling” demonstrates that the issue is not limited to the signaling model only, the education in Kenya seems to provide poor quality in terms of actual skill formation in relation to formal schooling enrollment and graduation, which will impact human capital returns independent of signaling effects. And signaling erosion and schooling inefficiency together do not sufficiently explain graduate underemployment: even one that maintained its signal value (the university) has co-existed with graduate unemployment because there are just not enough formal-sector jobs for the graduates of any sort, the same principle of dual-economy job creation analyzed in the boda boda chapter of this essay series, only this time in terms of the credential-attaining sub-population of the youth labor market.
In summary: The educational expansion in Kenya created many more workers who were schooled and credentialed, but failed to do much to increase demand for the labor of these workers at wage rates commensurate with the credential, because of the fact that the credentials no longer worked as signals, and because economic growth in the formal sector is not adequate to pay premiums to the few signaling credentials.
5. Implications
- For education policy: Since there is such a marked difference in return on education at lower/secondary level compared to university level, an educational policy strategy that tries to increase incomes through education should be one that does not emphasize numbers but rather skill quality and credentials that are capable of preserving their sorting function even as secondary education itself becomes universal.
- For labor market policy: Since formal-sector job creation is the limiting factor affecting wage growth rather than education, policies focusing on the creation of formal jobs (discussed under different perspectives in the other papers of this series that examine capital and infrastructure constraints) could be more beneficial to aggregate wage growth than education.
- For future primary research: One approach that could be applied in order to further expand on this project would be to conduct a small survey involving recent high school and college graduates who will have to indicate what they thought about whether the employers were impressed by the credential or by the skills they possessed as a way of proving the difference between the two concepts.
6. Limitations
The key Mincerian return-to-education estimates referenced in this paper (the decline between 1978 and 1995) are relatively old and industry-specific (manufacturing), and while compatible with the general signaling-erosion hypothesis, more recent industry-representative estimates of the return to education during the period since 2003 free education expansion have not been found in the relevant sources reviewed for this paper. The youth and graduate unemployment rates used in this paper are very inconsistent across Kenyan sources in terms of the definition and time frame, which the author uses to argue the difficulty of measuring youth unemployment in Kenya but which is also an indication that each of these figures cannot be taken as exact. Finally, the explanation offered by this paper in three parts (signaling erosion, schooling quality difference, demand absorption) is a combination of different streams of research literature rather than a single research paper that breaks down Kenyan wage stagnation into these three parts; for a comprehensive testing of this hypothesis, a dedicated empirical research paper is needed, such as the 2024 STEP survey based thesis cited in this paper.
References (selected)
- Appleton, S., Bigsten, A., & Manda, D. K. (1999, as cited in later literature). Changes in wages, wage inequality, and returns to human capital skills in Kenya, 1978-1995.
- Agesa, R. U., cited work on changes in wages, wage inequality, and returns to human capital skills in Kenya, 1977-2005.
- Kenya Institute for Public Policy Research and Analysis (KIPPRA). The Role of Education and Training in Reducing Poverty and Unemployment in Kenya, Discussion Paper Series.
- Oledibe, N. O. (2024). Returns to education and skills in the non-OECDs: evidence from urban Kenya. PhD thesis, University of Glasgow (using World Bank STEP Household Survey data).
- Kenya National Bureau of Statistics (KNBS), youth and graduate unemployment statistics, various years.
- International Journal of Research and Innovation in Social Science. Solving Unemployment in Kenya by Integrating Education, Training and Market.
- Gates Open Research. The Role of Technical and Vocational Education relative to Academic Schooling in the Transition of the Youth to Labour Markets in Kenya.
- Spence, M. (1973). Job market signaling. Quarterly Journal of Economics.
- People Daily (2025). Harsh employability reality for graduates, 2023 KNBS job-creation data by formal/informal sector.
Prepared as part of the East Africa Microeconomics Research Series. This is a student working paper that synthesises existing research and published data rather than presenting original fieldwork; feedback and data corrections are welcome via the contact page.