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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 look at lifetime inequality and the redistribution properties of taxes and benefits using a dynamic life-cycle model of women's education, labour supply and savings with family dynamics and rich individual heterogeneity in preferences and productivity.
Abstract: In this paper we look at lifetime inequality to address two main questions: How well does a modern tax system, based on annual information, target lifetime inequality? What aspects of the transfer system are most progressive from a lifetime perspective? To answer to these questions it is crucial to relate lifetime and annual inequality and determine the main building blocks of lifetime disparities. We look at lifetime inequality and the redistribution properties of taxes and benefits using a dynamic life-cycle model of women’s education, labour supply and savings with family dynamics and rich individual heterogeneity in preferences and productivity. The model is coupled with a detailed description of the UK personal tax and benefit system and is estimated on UK longitudinal data covering the 1990s and early 2000s. We show that the tax and benefits system is more redistributive from an annual than from a lifetime perspective, and is most progressive at the bottom of the income distribution in both cases. We then establish that heterogeneity in family experiences throughout adult life is the main vehicle through which the tax and benefits system moderates lifetime inequality. Although transitory, family conditions under which working is especially costly, such as lone-motherhood, are especially prevalent among the lifetime poor. By targeting this group, particularly using policies specifically designed to improve the work incentives of those with the lowest earnings capacity, the tax and benefits system does achieve life-cycle redistribution. Other policies like universal benefits towards family with children are less well targeted towards the lifetime poor but are more progressive and improve the work incentives in the middle 60% of the distribution of lifetime income.
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TL;DR: In this article, the authors simulate the investment decision facing a student and simulate risky earnings profiles in alternative options, with parameters taken from the very limited evidence, and estimate the ex ante risk in university education is a coefficient of variation of about 0.3, comparable with that in a randomly selected financial portfolio with some 30 stocks.
Abstract: The risk of investment in schooling has largely been ignored. We mimic the investment decision facing a student and simulate risky earnings profiles in alternative options, with parameters taken from the very limited evidence. The distribution of rates of return appears positively skewed. Our best estimate of ex ante risk in university education is a coefficient of variation of about 0.3, comparable with that in a randomly selected financial portfolio with some 30 stocks. With risk attitudes varying by parental background, this may be relevant for differences in schooling participation rates. Allowing for stochastic components in earnings also markedly affects expected returns.
19 citations
TL;DR: This article showed that the Garen technique may not be robust to selectivity bias when the choice variable is continuous, which is a result of the common situation where the empirical fit of the choice equation is moderately successful but not outstanding.
Abstract: When the choice variable is continuous, selectivity bias can in principle be dealt with by a procedure first suggested by Garen (1984). However, work reported in this paper on the estimation of hedonic wage equations with compensation for dangerous jobs, where selectivity bias could arise through the endogenous choice of jobs according to their riskiness, suggests that the Garen technique may not be robust. The lack of robustness comes from collinearity, which is a result of the common situation where the empirical fit of the choice equation is moderately successful but not outstanding.
19 citations
TL;DR: More educated, more mobile: Evidence from post-secondary education reform as mentioned in this paper examines the causal impact of the level of education on within-country migration and finds that polytechnic graduates have a significantly higher probability of migrating than vocational college graduates.
Abstract: More educated, more mobile? Evidence from post-secondary education reform. Spatial Economic Analysis. This paper examines the causal impact of the level of education on within-country migration. To account for biases resulting from selection into post-secondary education, it uses a large-scale reform within the higher education system that gradually transformed former vocational colleges into polytechnics in Finland in the 1990s. This reform created quasi-exogenous variation in the supply of higher education over time and across regions. The results based on multinomial treatment effects models and population register data show that, overall, polytechnic graduates have a significantly higher probability of migrating than vocational college graduates, although the estimates vary, for example, by gender, field of study and region.
19 citations
TL;DR: The authors used generalized method of moments to estimate the parameters of a range of measurement error models, including forms of both classical and mean-reverting error models; they estimate the models using a sample of identical twins and a sample sample of non-twin siblings.
Abstract: The value of sibling data for identifying the causal effect of schooling on wages hinges on our ability to eliminate biases due to the mismeasurement of schooling. Analysts typically assume errors in schooling reports are "classical." In this study, we use generalized method of moments to estimate the parameters of a range of measurement error models, including forms of both classical and mean-reverting error models; we estimate the models using a sample of identical twins and a sample of non-twin siblings. The results of likelihood ratio-type tests reveal that variants of classical measurement error models fit both datasets about as well as more flexible models.
19 citations