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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: The authors developed a new test for endogeneity that is robust to any form of non-linearity, even when the true model may be nonlinear, and showed that the test works well even when only one valid instrument is available.
Abstract: In many empirical studies, researchers seek to estimate causal relationships using instrumental variables. When only one valid instrumental variable is available, researchers are limited to estimating linear models, even when the true model may be non-linear. In this case, ordinary least squares and instrumental variable estimators will identify different weighted averages of the underlying marginal causal effects even in the absence of endogeneity. As such, the traditional Hausman test for endogeneity is uninformative. We build on this insight to develop a new test for endogeneity that is robust to any form of non-linearity. Notably, our test works well even when only a single valid instrument is available. This has important practical applications, since it implies that researchers can estimate a completely unrestricted non-linear model by OLS, and then use our test to establish whether those OLS estimates are consistent. We re-visit a few recent empirical examples to show how the test can be used to shed new light on the role of non-linearity.
10 citations
TL;DR: In this paper, the authors present results on human capital accumulation for the Swiss economy and find that the index of labor quality has grown at a rate of 0.5 % per year from 1991 to 2006.
Abstract: This paper presents results on human capital accumulation for the Swiss economy. We find that the index of labor quality has grown at a rate of 0.5 % per year from 1991 to 2006. The main sources are the growth in average levels of education and the passing of the baby boom cohort through the age structure of the workforce. Projections over the period 2006-2050 suggest that labor quality growth will slow down with time. We also calculate a quality-adjusted unemployment rate and find that the unemployment rate is reduced by about 0.3 pp when human capital accumulation is taken into account.
10 citations
TL;DR: In this paper, the authors investigated whether education and working in a physically demanding job causally impact temporary work incapacity (TWI), i.e. the inflow to disability via sickness absence.
Abstract: This paper investigates whether education and working in a physically demanding job causally impact temporary work incapacity (TWI), i. e. sickness absence and permanent work incapacity (PWI), i. e. the inflow to disability via sickness absence. Our contribution is to allow for endogeneity of both education and occupation by estimating a quasi-maximum-likelihood discrete factor model. Data on sickness absence and disability spells for the population of older workers come from the Danish administrative registers for 1998–2002. We generally find causal effects of both education and occupation on TWI. Once we condition on temporary incapacity, we find again a causal effect of education on PWI, but no effect of occupation. Our results confirm that workers in physically demanding jobs are broken down by their work over time (women more than men) but only in terms of TWI.
10 citations
01 Jan 2005
TL;DR: This article found that doubling an adult's traditional knowledge correlates with a median improvement in BMI of 6.3%; the effect is stronger for subjects without any schooling and for those living far from market town.
Abstract: In industrial economies schooling and the skills and behaviors learned in school produce positive market and non-market returns, but do traditional forms of human capital also pay off, and do modern and traditional forms of human capital act as complements or substitutes in shaping well being? Traditional knowledge embodies humanity’s heritage and diversity and represents its oldest and most ubiquitous form of human capital. Drawing on data from 450 adults (16+ years of age) from a native Amazonian society of foragers and horticulturalists in Bolivia, we estimate the direct and interaction effects of schooling (plus modern skills) and traditional plant knowledge on body-mass index (BMI; kg/mt 2 ). Doubling an adult’s traditional knowledge correlates with a median improvement in BMI of 6.3%; the effect is stronger for subjects without any schooling and for those living far from market town. Effects become insignificant after controlling for fixed attributes of households. Schooling produces no significant effects on BMI, probably because of the low levels of schooling (mean schooling=1.91). Returns to traditional knowledge did not vary in relation to the subject’s sex. Though schooling and math each correlated negatively with traditional knowledge, modern and traditional human capital did not undermine or complement each other in shaping BMI.
10 citations
TL;DR: This paper examined the returns to education in China, separating out credential effects from pure years-of-schooling effects using the China Household Income Project (CHIP) data for 1995 and 2002.
Abstract: Using the China Household Income Project (CHIP) data for 1995 and 2002, we examine the returns to education in China, separating out credential effects from pure years-of-schooling effects. The results are broadly consistent with the implications of China moving towards a market-oriented economy: increasing returns to education where both years of schooling and credentials from completing key phases are rewarded; a decline in the importance of credentials as firms have more discretion to select the best-suited employees irrespective of their credentials; more emphasis on credentials in the state sector; less emphasis on credentials for long-tenured employees for whom the employer has more opportunity to assess productivity without relying on credentials; and a greater importance of credentials for females for whom the value of such signals may be more important.
10 citations