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The causal effect of education on earnings
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: In this article, the authors test the hypothesis that the returns to skills are highest in countries that allow individuals to respond to shocks, using estimated returns to schooling and work experience from 122 household surveys in 86 developing countries.
Abstract: In 1975 Theodore W. Schultz suggested that the returns to human capital are highest in economic environments experiencing unexpected price, productivity, and technology shocks that create “disequilibria.” In such environments, the ability of firms and individuals to adapt their resource allocations to shocks becomes most valuable. In the case of negative shocks, government policies that mitigate the impact of the shock will also limit the returns to the skills of managing risk or adapting resources to changing market forces. In the case of positive shocks, government policies may restrict access to credit, labor, or financial markets in ways that limit reallocation of resources toward newly emerging profitable sectors. This article tests the hypothesis that the returns to skills are highest in countries that allow individuals to respond to shocks. Using estimated returns to schooling and work experience from 122 household surveys in 86 developing countries, the article demonstrates a strong positi...
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TL;DR: In this paper, a randomized intervention that grants a cash subsidy encouraging school attendance among a sub-group of eligible children within small rural villages in Mexico was studied, and it was found that the eligible children tend to attend school more frequently, but also the ineligible children acquire more schooling when the subsidy is introduced in their local village.
Abstract: The aim of this paper is to study whether schooling choices are affected by social interactions. Such social interactions may be important because children enjoy spending time with other children or parents learn from other parents about the ability of their children. Identification is based on a randomized intervention that grants a cash subsidy encouraging school attendance among a sub-group of eligible children within small rural villages in Mexico. Results indicate that (i) the eligible children tend to attend school more frequently, (ii) but also the ineligible children acquire more schooling when the subsidy is introduced in their local village, (iii) social interactions are economically important, and (iv) they may arise due to changes in parents' perception of their children's ability.
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TL;DR: Blom, Holm-Nielsen, and Verner as discussed by the authors investigated the relationship between labor market earnings and education and found that the returns to education in the labor market fundamentally changed between 1982 and 1998, and the marginal reduction in wage inequality that occurred in this period was linked primarily to a reduction to schooling and only secondarily to a more equitable distribution of schooling.
Abstract: Improving access to tertiary education in Brazil would expand the supply of highly skilled labor - now too small to meet demand - enhancing prospects for both greater economic growth and lower wage inequality. The educational attainment of Brazil's labor force has gradually increased over the past two decades. At the same time, the government has pursued a series of economic structural adjustment policies. Blom, Holm-Nielsen, and Verner investigate how these simultaneous advances have altered the relationship between labor market earnings and education. They find that the returns to education in the labor market fundamentally changed between 1982 and 1998. While the returns to tertiary education increased sharply, the returns to primary education dropped by 26 percent and those to lower secondary by 35 percent. Moreover, the authors argue, the marginal reduction in wage inequality that occurred in this period was linked primarily to a reduction in the returns to schooling and only secondarily to a more equitable distribution of schooling. The findings suggest that the supply of highly skilled labor is inadequate to meet demand. That suggests a need for policy action aimed at increasing access to and completion of tertiary education. Increasing the supply of highly skilled labor would improve prospects for both economic growth and reduced wage inequality. 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 assess the need for expansion of the education system, in particular, tertiary education. The authors may be contacted at ablom@worldbank.org, lholmnielsen@worldbank.org, or dverner@worldbank.org.
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TL;DR: In this paper, the authors assess the potential of ''workplace training'' with reference to German apprenticeship and find that training is transferable across a wide range of occupations, such as a one-digit occupation group.
Abstract: This paper assesses the potential of `workplace training'' with reference to German Apprenticeship. When occupational matching is important, we derive conditions under which firms provide `optimal'' training packages. Since the German system broadly meets these conditions, we evaluate the effectiveness of apprenticeship using a large administrative dataset. We find returns to apprenticeship for even the lowest ability school-leavers comparable to standard estimates of the return to school, and show that training is transferable across a wide range of occupations, such as a one-digit occupation group. We conclude that the positive experience with German Apprenticeship Training may guide the design of similar policies in other countries.
38 citations