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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 2005
TL;DR: Hanushek et al. as discussed by the authors presented basic evidence about the impact of school quality on individual earnings and on economic growth, focusing on variations across countries at different levels of development.
Abstract: Most empirical analyses of human capital have concentrated solely on the quantity of schooling attained by individuals, ignoring quality differences. This focus contrasts sharply with policy considerations that almost exclusively consider school quality issues. This paper presents basic evidence about the impact of school quality on individual earnings and on economic growth. In assessing these effects, special attention is given to variations across countries at different levels of development. * Hoover Institution, Stanford University; University of Texas at Dallas; and National Bureau of Economic Research. Economic Analysis of School Quality By Eric A. Hanushek Economists have devoted considerable attention to understanding how human capital affects a variety of economic outcomes. The underlying notion is that individuals make investment decisions in themselves through schooling and other routes. The accumulated skills that are relevant for the labor market from these investments over time represent an important component of the human capital of an individual. The investments made to improve skills then return future economic benefits in much the same way that a firm’s investment in a set of machines (physical capital) returns future production and income. In the case of public education, parents and public officials act as trustees for their children in setting many aspects of the investment paths. In looking at human capital and its implications for future outcomes, economists are frequently agnostic about where these skills come from or how they are produced. Although we return to that below, it is commonly presumed that formal schooling is one of several important contributors to the skills of an individual and to human capital. It is not the only factor. Parents, individual abilities, and friends undoubtedly contribute. Schools nonetheless have a special place because they are most directly affected by public policies. For this reason, we frequently emphasize the role of schools. The human capital perspective immediately makes it evident that the real issues are ones of long-run outcomes. Future incomes of individuals are related to their past investments. It is not their income while in school or their income in their first job. Instead, it is their income over the course of their working life. The distribution of income in the economy similarly involves both the mixture of people in the economy and the pattern of their incomes over their lifetime. Specifically, most measures
8 citations
TL;DR: This paper used data from the 2006-07 Adult Literacy and Life Skills survey in New Zealand to examine how years of foreign and domestic education affect earnings in the labour market, and found that exposure to foreign education can lead to a triple gain: for the country where the education is obtained, for the students' home country and for students themselves.
Abstract: The education services provided in any given country increasingly contribute to human capital that is employed in another country. On the one hand, graduates may seek to obtain the highest return to the knowledge they gained in their home country by working abroad. On the other hand, some students purchase educational services abroad and will subsequently work abroad, or return home to utilize the internationally acquired knowledge in the domestic labour market. In this paper we use data from the 2006-07 Adult Literacy and Life Skills survey in New Zealand to examine how years of foreign and domestic education affect earnings in the labour market. We account for differences in innate ability by aggregating subjective responses to pertinent questions in the survey and by incorporating parents' educational background. Our findings reconfirm the extensive evidence that education gained in a country of birth has generally a lower return in a foreign labour market than the native born receive in this labour market for the equivalent education. Post-settlement education in the host country has a higher return for migrants than for comparable native born. We also find that the highest returns are obtained among those who, after studying abroad, return home to work a fact for which there has been to date scarce evidence. Thus, exposure to foreign education can lead to a triple gain: for the country where the education is obtained, for the students' home country and for the students themselves.
8 citations
TL;DR: In this paper, the authors estimate the returns to rural schooling in China, addressing both endogenous schooling and self-selection using the two-step procedure developed in Wooldridge (2002, p. 586), and find that rural education can generate a respectable level of economic returns if policies are designed to provide greater school accessibility to rural individuals.
Abstract: Purpose
The purpose of this paper is to estimate the returns to rural schooling in China, addressing both endogeneity in rural individuals’ schooling and self-selection into off-farm work.
Design/methodology/approach
This paper exploits geographical proximity to rural secondary schools to create instrumental variables (IV) for individuals’ years of schooling. It addresses both endogenous schooling and self-selection using the two-step procedure developed in Wooldridge (2002, p. 586).
Findings
The preferred IV estimate of schooling returns, 7.6 percent, is considerably higher than most previous estimates found in rural China.
Originality/value
This paper is among the few papers that examine returns to rural schooling in China while simultaneously addressing both endogeneity in individuals’ schooling and self-selection into off-farm work. Its findings suggest that rural education in China is potentially able to generate a respectable level of economic returns if policies are designed to provide greater school accessibility to rural individuals.
8 citations
Journal Article•
TL;DR: In this article, evidence assembled from household surveys collected from 1985 and 1998 from Ghana, Cote d'Ivoire, Kenya, and South Africa indicates that higher wages compensate individuals in these African countries for enrolling in school.
Abstract: Evidence assembled from household surveys collected from 1985 and 1998 from Ghana, Cote d’Ivoire, Kenya, and South Africa indicates that higher wages compensate individuals in these African countries for enrolling in school It is commonly believed that wage returns to schooling are highest at the primary levels and decrease thereafter at higher school levels, but the data from Africa summarized here indicate the opposite, with private wage returns being highest at the secondary and higher education levels There appear to be sufficient financial incentives today to motivate students to enroll in higher education, and any public subsidies should be allocated only to those students who come from poor families and whose parents are relatively least educated, relative to their generation If students in higher education in Africa from upper-income families paid tuitions which were equal to half the public subsidies for their schooling, these revenues would finance fellowships for disadvantaged students and also provide the resources and incentives to expand higher education into those fields where trained manpower is scarcest today in Africa They would thus create the conditions for greater self-governance of higher education while fostering a responsible separation from political power
8 citations
01 Jan 2003
TL;DR: The authors examined whether income uncertainty rises with education and found that risk-averse students tend to choose careers with lower volatility, suggesting that income uncertainty can be a relevant determinant of schooling decisions especially for riskaverse high school graduates whose returns to college education are at the margin.
Abstract: This paper examines whether income uncertainty rises with education, important for understanding why some students are hesitant to attend college. I focus on the identification of the volatility differential — the gap in the variance of the log wage between college and high school careers. I control for individual heterogeneity, including demographics, scholastic ability, parental education, and fields of major. More importantly, I address a self selection problem that arises because risk-averse agents tend to choose careers with lower volatility. I find that the volatility differential between college and high school is significantly positive, suggesting that income uncertainty can be a relevant determinant of schooling decisions especially for risk-averse high school graduates whose returns to college education are at the margin. (JEL Classification: J310.
8 citations