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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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01 Jan 2013
TL;DR: In this article, the authors adopt the design typology of Leslie Kish (1987), which advocates an appropriate balance of randomization, representation, and realism, and illustrate how all three elements are integrated aspects of meaningful causal analysis.
Abstract: For a half-century, sociology and allied social sciences have worked with a model of research design founded on a distinction between internal validity, the capacity of designs to support statements about cause and effect, and external validity, the extent to which the results from specific studies can be generalized beyond the batch of data on which they are founded. The distinction is conceptually useful and has great pedagogic value, that is, the association of the experimental model with internal validity, and random sampling with external validity. The advent of the potential outcomes model of causation, by emphasizing the definition of a causal effect at the unit level and the heterogeneity of causal effects, has made it clear how indistinct (and interpenetrated) are these “twin pillars” of research design. This is the theme of this chapter, which inveighs against the idea of a hierarchy of research design desiderata, with causal inference at the peak. Rather, I adopt the design typology of Leslie Kish (1987), which advocates an appropriate balance of randomization, representation, and realism, and illustrate how all three elements (and not just randomization, the internal validity design mechanism) are integrated aspects of meaningful causal analysis. What is meaningful causal analysis? It depends first and foremost on getting straight why we are doing what we are doing. Understanding why something has happened may tell us a lot about what will happen if we were actually to do something, but this is not necessarily so.
9 citations
TL;DR: It is found that attending higher tracks leads to increases in years of schooling by around 1.5 years for students at the lowest and the highest choice margin, and wage gains of around 15% and 5%, respectively.
Abstract: This study analyzes the long-run effects of secondary school track assignment for students at the achievement margin. Theoretically, track assignment maximizes individual outcomes when thresholds between tracks are set at the level of the indifferent student, and any other thresholds would imply that students at or around the margin are better off by switching tracks. We exploit non-linearities in the probability of track assignment across achievement to empirically identify the effect of track assignment on educational attainment and wages of students in the Netherlands, who can be assigned to four different tracks. We find that attending higher tracks leads to increases in years of schooling by around 1.5 years for students at the lowest and the highest choice margin, and wage gains of around 15% and 5%, respectively. For the margin between the two middle tracks, attending the higher of the two tracks has no effect on educational attainment and decreases wages by around 12%. The negative returns for the medium margin and the relatively low returns for the higher margin (compared to the required educational investments) are partly mediated by motivation and study choice.
9 citations
TL;DR: In this paper, the returns to education in self-employment are addressed in four different specifications of the relationship between log income and years of schooling, ranging from a standard Mincer equation with a constant percentage increase in income for an additional year of schooling to the most flexible specification with dummy variables for different combinations of years of education and fields of study.
Abstract: The returns to education in self-employment are addressed in four different specifications of the relationship between log income and years of schooling. The specifications range from a standard Mincer equation with a constant percentage increase in income for an additional year of schooling to the most flexible specification with dummy variables for different combinations of years of schooling and fields of study. Based on the more flexible specifications, important non-linearities and heterogeneity in the returns to education in self-employment are found. These results are robust across different estimation methods: OLS, Heckit correction models handling sample selection, and IV dealing with the potential endogeneity of years of schooling. Moreover, the results are robust to the use of different sample years, different definitions of self-employment, and different income measures for the self-employed.
9 citations