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The causal effect of education on earnings

01 Jan 1999-Handbook of Labor Economics (Elsevier)-pp 1801-1863
TL;DR: This paper surveys the recent literature on the causal relationship between education and earnings and concludes that the average (or average marginal) return to education is not much below the estimate that emerges from a standard human capital earnings function fit by OLS.
Abstract: This paper surveys the recent literature on the causal relationship between education and earnings. I focus on four areas of work: theoretical and econometric advances in modelling the causal effect of education in the presence of heterogeneous returns to schooling; recent studies that use institutional aspects of the education system to form instrumental variables estimates of the return to schooling; recent studies of the earnings and schooling of twins; and recent attempts to explicitly model sources of heterogeneity in the returns to education. Consistent with earlier surveys of the literature, I conclude that the average (or average marginal) return to education is not much below the estimate that emerges from a standard human capital earnings function fit by OLS. Evidence from the latest studies of identical twins suggests a small upward "ability" bias -- on the order of 10%. A consistent finding among studies using instrumental variables based on institutional changes in the education system is that the estimated returns to schooling are 20-40% above the corresponding OLS estimates. Part of the explanation for this finding may be that marginal returns to schooling for certain subgroups -- particularly relatively disadvantaged groups with low education outcomes -- are higher than the average marginal returns to education in the population as a whole.
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TL;DR: For example, this paper found that differences in initial conditions account for more of the variation in lifetime earnings, lifetime wealth, and lifetime utility than do differences in shocks received over the working lifetime.
Abstract: Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime? We answer this question within a model that features idiosyncratic shocks to human capital , estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth. We find that, as of age 23, differences in initial conditions account for more of the variation in lifetime earnings, lifetime wealth, and lifetime utility than do differences in shocks received over the working lifetime. ( JEL D31, D91, J24, J31) To what degree is lifetime inequality due to differences across people established early in life as opposed to differences in luck experienced over the working lifetime? Among the individual differences established early in life, which ones are the most important? A convincing answer to these questions is of fundamental importance. First, and most simply, an answer serves to contrast the potential importance of the myriad policies directed at modifying or at providing insurance for initial conditions (e.g., public education) against those directed at shocks over the working lifetime (e.g., unemployment insurance). Second, a discussion of lifetime inequality cannot go too far before discussing which specific type of initial condition is the most critical for determining how one fares in life. Third, a useful framework for answering these questions should also be central in the analysis of a wide range of policies considered in macroeconomics, public finance, and labor economics. We view lifetime inequality through the lens of a risky human capital model. Agents differ in terms of three initial conditions: initial human capital, learning ability, and financial wealth. Initial human capital can be viewed as controlling the intercept of an agent's mean earnings profile, whereas learning ability acts to rotate

470 citations

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464 citations

Journal ArticleDOI
TL;DR: The results suggest caution as to the likely health returns to educational interventions focused on increasing educational attainment among those at risk of dropping out of high school, a target of recent health policy efforts.
Abstract: There is a strong, positive, and well-documented correlation between education and health outcomes. In this paper, we attempt to understand to what extent this relationship is causal. Our approach exploits two changes to British compulsory schooling laws that generated sharp across-cohort differences in educational attainment. Using regression discontinuity methods, we find the reforms did not affect health although the reforms impacted educational attainment and wages. Our results suggest caution as to the likely health returns to educational interventions focused on increasing educational attainment among those at risk of dropping out of high school, a target of recent health policy efforts.

460 citations

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TL;DR: In this paper, the effects of different types of training programmes over a horizon of more than seven years were identified using bias corrected weighted multiple neighbors matching, and they found that all programmes have negative effects in the short run and positive effects over a four years.
Abstract: Between 1991 and 1997 West Germany spent on average about 3.6 bn Euro per year on public sector sponsored training programmes for the unemployed. We base our empirical analysis on a new administrative data base that plausibly allows for selectivity correction by microeconometric matching methods. We identify the effects of different types of training programmes over a horizon of more than seven years. Using bias corrected weighted multiple neighbours matching we find that all programmes have negative effects in the short run and positive effects over a horizon of about four years. However, for substantive training programmes with duration of about two years gains in employment probabilities of more than 10% points appear to be sustainable, but come at the price of large negative lock-in effects.

458 citations

Journal ArticleDOI
TL;DR: A review of the empirical literature on social capital, paying close attention to the statistical and theoretical assumptions involved, can be found in this paper, showing that there is evidence that genuine progress has been made in estimating the effect of social capital.
Abstract: Although there is a large literature on social capital, empirical estimates of the effect of social capital may be biased because of social homophily, the tendency of similar people to become friends with each other. Despite the methodological difficulties, a recent literature has emerged across several different disciplines that tries to estimate the causal effect of social capital. This paper reviews this recent empirical literature on social capital, paying close attention to the statistical and theoretical assumptions involved. Overall, there is evidence that genuine progress has been made in estimating the effect of social capital. The reviewed articles should provide useful examples for future research.

453 citations