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Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems
TL;DR: In this paper, a set of recent studies have attempted to measure the causal effect of education on labor market earnings by using institutional features of the education system as exogenous determinants of schooling outcomes.
Abstract: This paper reviews a set of recent studies that have attempted to measure the causal effect of education on labor market earnings by using institutional features of the supply side of the education system as exogenous determinants of schooling outcomes. A simple theoretical model that highlights the role of comparative advantage in the optimal schooling decision is presented and used to motivate an extended discussion of econometric issues, including the properties of ordinary least squares and instrumental variables estimators. A review of studies that have used compulsory schooling laws, differences in the accessibility of schools, and similar features as instrumental variables for completed education reveals that the resulting estimates of the return to schooling are typically as big or bigger than the corresponding ordinary least squares estimates. One interpretation of this finding is that marginal returns to education among the low-education subgroups typically affected by supply-side innovations tend to relatively high, reflecting their high marginal costs of schooling, rather than low ability that limits their return to education.
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TL;DR: In this paper, the authors investigated conditions sufficient for identification of average treatment effects using instrumental variables and showed that the existence of valid instruments is not sufficient to identify any meaningful average treatment effect.
Abstract: We investigate conditions sufficient for identification of average treatment effects using instrumental variables. First we show that the existence of valid instruments is not sufficient to identify any meaningful average treatment effect. We then establish that the combination of an instrument and a condition on the relation between the instrument and the participation status is sufficient for identification of a local average treatment effect for those who can be induced to change their participation status by changing the value of the instrument. Finally we derive the probability limit of the standard IV estimator under these conditions. It is seen to be a weighted average of local average treatment effects.
3,154 citations
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TL;DR: In the 40-plus year history of estimates of returns to investment in education, there have been several reviews of the empirical results in attempts to establish patterns as discussed by the authors, and many more estimates from a wide variety of countries, including over time evidence, and estimates based on new econometric techniques, reaffirm the importance of human capital theory.
Abstract: Returns to investment in education based on human capital theory have been estimated since the late 1950s. In the 40-plus year history of estimates of returns to investment in education, there have been several reviews of the empirical results in attempts to establish patterns. Many more estimates from a wide variety of countries, including over time evidence, and estimates based on new econometric techniques, reaffirm the importance of human capital theory. Psacharopoulos and Patrinos review and present the latest estimates and patterns as found in the literature at the turn of the century. However, because the availability of rate of return estimates has grown exponentially, the authors include a new section on the need for selectivity in comparing returns to investment in education and establishing related patterns. This paper - a product of the Education Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to document the benefits of investments in education.
2,461 citations
[...]
TL;DR: This paper showed the importance of cognitive and non-cognitive skills that are formed early in the life cycle in accounting for racial, ethnic and family background gaps in schooling and other dimensions of socioeconomic success.
Abstract: This paper considers alternative policies for promoting skill formation that are targeted to different stages of the life cycle. We demonstrate the importance of both cognitive and noncognitive skills that are formed early in the life cycle in accounting for racial, ethnic and family background gaps in schooling and other dimensions of socioeconomic success. Most of the gaps in college attendance and delay are determined by early family factors. Children from better families and with high ability earn higher returns to schooling. We find only a limited role for tuition policy or family income supplements in eliminating schooling and college attendance gaps. At most 8% of American youth are credit constrained in the traditional usage of that term. The evidence points to a high return to early interventions and a low return to remedial or compensatory interventions later in the life cycle. Skill and ability beget future skill and ability. At current levels of funding, traditional policies like tuition subsidies, improvements in school quality, job training and tax rebates are unlikely to be effective in closing gaps.
1,656 citations
TL;DR: In this paper, the authors formalize the concepts of self-productivity and complementarity of human capital investments and use them to explain the evidence on skill formation, and provide a theoretical framework for interpreting the evidence from a vast empirical literature, for guiding the next generation of empirical studies, and for formulating policy.
Abstract: This paper presents economic models of child development that capture the essence of recent findings
from the empirical literature on skill formation. The goal of this essay is to provide a theoretical framework
for interpreting the evidence from a vast empirical literature, for guiding the next generation of empirical
studies, and for formulating policy. Central to our analysis is the concept that childhood has more than one
stage. We formalize the concepts of self-productivity and complementarity of human capital investments
and use them to explain the evidence on skill formation. Together, they explain why skill begets skill
through a multiplier process. Skill formation is a life cycle process. It starts in the womb and goes on
throughout life. Families play a role in this process that is far more important than the role of schools.
There are multiple skills and multiple abilities that are important for adult success. Abilities are both
inherited and created, and the traditional debate about nature versus nurture is scientiÞcally obsolete.
Human capital investment exhibits both self-productivity and complementarity. Skill attainment at one
stage of the life cycle raises skill attainment at later stages of the life cycle (self-productivity). Early
investment facilitates the productivity of later investment (complementarity). Early investments are not
productive if they are not followed up by later investments (another aspect of complementarity). This
complementarity explains why there is no equity-efficiency trade-off for early investment. The returns to
investing early in the life cycle are high. Remediation of inadequate early investments is difficult and very
costly as a consequence of both self-productivity and complementarity.
1,585 citations
01 Jan 2007
1,155 citations
References
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Book•
15 May 2009
TL;DR: In this paper, the effects of investment in education and training on earnings and employment are discussed. But the authors focus on the relationship between age and earnings and do not explore the relation between education and fertility.
Abstract: "Human Capital" is Becker's study of how investment in an individual's education and training is similar to business investments in equipment. Becker looks at the effects of investment in education on earnings and employment, and shows how his theory measures the incentive for such investment, as well as the costs and returns from college and high school education. Another part of the study explores the relation between age and earnings. This edition includes four new chapters, covering recent ideas about human capital, fertility and economic growth, the division of labour, economic considerations within the family, and inequality in earnings.
12,071 citations
Book•
01 May 1974
TL;DR: In this article, the authors analyzed the distribution of worker earnings across workers and over the working age as consequences of differential investments in human capital and developed the human capital earnings function, an econometric tool for assessing rates of return and other investment parameters.
Abstract: Analyzes the distribution of worker earnings across workers and over the working age as consequences of differential investments in human capital. The study also develops the human capital earnings function, an econometric tool for assessing rates of return and other investment parameters.
8,587 citations
Posted Content•
TL;DR: In this paper, the impact of investments in human capital on an individual's potential earnings and psychic income was analyzed, taking into account varying cultures and political regimes, the research indicates that economic earnings tend to be positively correlated to education and skill level.
Abstract: A diverse array of factors may influence both earnings and consumption; however, this work primarily focuses on the impact of investments in human capital upon an individual's potential earnings and psychic income. For this study, investments in human capital include such factors as educational level, on-the-job skills training, health care, migration, and consideration of issues regarding regional prices and income. Taking into account varying cultures and political regimes, the research indicates that economic earnings tend to be positively correlated to education and skill level. Additionally, studies indicate an inverse correlation between education and unemployment. Presents a theoretical overview of the types of human capital and the impact of investment in human capital on earnings and rates of return. Then utilizes empirical data and research to analyze the theoretical issues related to investment in human capital, specifically formal education. Considered are such issues as costs and returns of investments, and social and private gains of individuals. The research compares and contrasts these factors based upon both education and skill level. Areas of future research are identified, including further analysis of issues regarding social gains and differing levels of success across different regions and countries. (AKP)
7,869 citations
TL;DR: In this paper, the authors developed asymptotic distribution theory for instrumental variable regression when the partial correlation between the instruments and a single included endogenous variable is weak, here modeled as local to zero.
Abstract: This paper develops asymptotic distribution theory for instrumental variable regression when the partial correlation between the instruments and a single included endogenous variable is weak, here modeled as local to zero. Asymptotic representations are provided for various instrumental variable statistics, including the two-stage least squares (TSLS) and limited information maximum- likelihood (LIML) estimators and their t-statistics. The asymptotic distributions are found to provide good approximations to sampling distributions with just 20 observations per instrument. Even in large samples, TSLS can be badly biased, but LIML is, in many cases, approximately median unbiased. The theory suggests concrete quantitative guidelines for applied work. These guidelines help to interpret Angrist and Krueger's (1991) estimates of the returns to education: whereas TSLS estimates with many instruments approach the OLS estimate of 6%, the more reliable LIML and TSLS estimates with fewer instruments fall between 8% and 10%, with a typical confidence interval of (6%, 14%).
5,249 citations
TL;DR: In this article, the use of instruments that explain little of the variation in the endogenous explanatory variables can lead to large inconsistencies in the IV estimates even if only a weak relationship exists between the instruments and the error in the structural equation.
Abstract: We draw attention to two problems associated with the use of instrumental variables (IV), the importance of which for empirical work has not been fully appreciated. First, the use of instruments that explain little of the variation in the endogenous explanatory variables can lead to large inconsistencies in the IV estimates even if only a weak relationship exists between the instruments and the error in the structural equation. Second, in finite samples, IV estimates are biased in the same direction as ordinary least squares (OLS) estimates. The magnitude of the bias of IV estimates approaches that of OLS estimates as the R 2 between the instruments and the endogenous explanatory variable approaches 0. To illustrate these problems, we reexamine the results of a recent paper by Angrist and Krueger, who used large samples from the U.S. Census to estimate wage equations in which quarter of birth is used as an instrument for educational attainment. We find evidence that, despite huge sample sizes, th...
4,219 citations