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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 paper, the authors test whether these reforms are correlated to changes in school quality, and school quality is an omitted variable, and find that they cannot reject the internal validity of this popular identification strategy.
Abstract: In the large empirical literature that investigates the causal effects of education on outcomes such as health,
wages and crime, it is customary to measure education with years of schooling, and to identify these effects using the exogenous variation provided by school reforms increasing compulsory education and minimum school leaving age. If these reforms are correlated to changes in school quality, and school quality is an omitted variable, this identification strategy may fail. We test whether this is the case by using the information provided by two distinct test scores on mathematics and reading and find that we cannot reject the internal validity of this popular identification strategy.
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TL;DR: In this paper, the authors explore the use of an alternative means of assessing returns to education by examining shifts in the likelihood of gaining "labour market success" from various levels of education.
Abstract: Students in many countries face increased costs of education in the form of direct payments and future tax liabilities and, as a consequence, their education decisions have taken on a greater financial dimension. This has refocused attention on obtaining meaningful estimates of the return to education. Routinely these returns are estimated as the additional earnings derived by an individual following their acquisition of an additional one year of education. However, the use of earnings data in this context is not without methodological problems including likely attenuation and ability bias in measuring the earnings/education relationship, issues concerning the appropriate rate of discount to apply to observed earnings gains and the appropriateness of using years‐of‐education as the measure of educational attainment. In this paper we explore the use of an alternative means of assessing returns to education by examining shifts in the likelihood of gaining ‘labour market success’ from various levels of educa...
10 citations
TL;DR: Zhang et al. as mentioned in this paper examined the effect of physical appearance on the hourly wage and found that good-looking individuals earn roughly 5.4% more than the rest, while bad-looking ones earn roughly 3.3% less.
10 citations
TL;DR: In this paper, the authors estimate the increase in earnings from a law degree relative to a bachelor's degree for graduates of different race/ethnic groups, and they find that the median annual law earnings premium is approximately $41,000 for whites, $34, 000 for Asians, $33,500 for blacks, and $28,000 of Hispanics.
10 citations
TL;DR: In this article, the authors identify the criminal capital effect by considering illegal earnings and information regarding institutional stays over a seven-year period, and find that both facility measures have independent positive effects on an individual's daily illegal wage rate, even after controlling for important time varying covariates.
Abstract: A growing consensus suggests that incarcerating offenders tends to have either null or criminogenic effects at both the individual and neighborhood levels. There is also further evidence that there are unintended consequences of incarcerating juvenile offenders such as delayed psychosocial development and school dropout. The current study considers a much less examined hypothesis — that correctional environments can facilitate the accumulation of “criminal capital” and might actually encourage offending by serving as a school of crime. Using unique panel data from a sample of serious juvenile offenders, we are able to identify the criminal capital effect by considering illegal earnings and information regarding institutional stays over a seven year period. We have two separate measures that tap into the different mechanisms by which offenders can acquire criminal capital within institutions: the prevalence of friends in the facility who have committed income generating crimes and the length of institutional stays as a cumulative dosage. We find that both facility measures have independent positive effects on an individual’s daily illegal wage rate, even after controlling for important time varying covariates. Theoretical and policy implications are discussed.
10 citations