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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: This article developed and explored signaling in the market for education based on imperfectly observed heterogeneity in the returns to education rather than heterogeneity in costs, and proved that no separating equilibrium exists, and analyzed the mixed strategy equilibrium to produce new results due to the presence of strategic complementarities.
Abstract: This paper develops and explores signaling in the market for education based on imperfectly observed heterogeneity in the returns to education rather than heterogeneity in costs. Workers of heterogeneous abilities face the same costs of education, yet the productivity gain from education is higher for more able workers, and employers' observations of productivity are noisy. The paper presents the necessary and sufficient condition replacing the single crossing property in this context, proves that no separating equilibrium exists, and analyzes the mixed strategy equilibrium to produce some new results due to the presence of strategic complementarities.
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01 Jan 2013
TL;DR: In this article, the authors quantified the achievement gap between Roma and non-Roma students in East Central Europe and assessed the potential causes of the gap using the UNDP survey of 2011, the only comparable data on the Roma spanning many countries, and showed that the gap in the chances to get secondary education is substantial in all countries.
Abstract: This study quantifies the achievement gap between Roma and non-Roma students in East Central
Europe and assesses the potential causes of the gap. Using the UNDP survey of 2011, the only
comparable data on the Roma spanning many countries, we show that the gap in the chances to
get secondary education is substantial in all countries. When comparing young adults living with
parents of comparable income and educational attainment, the gap drops by more than a half in
most countries. Using unique data from Hungary, we assess the gap in standardized test scores and
show that it is comparable to the size of the Black-White test score gap in the U.S.A. in the 1980’s.
The test score gap in Hungary is almost entirely explained by social differences in income, wealth
and parental education, and ethnic factors do not play a significant role. We identify two major
mechanisms by which the social disadvantages of Roma students lead to lower skills. Their home
environment is less favorable for their cognitive development, and their schools are characterized
by a lower quality educational environment. Ethnic differences in the home environment are,
again, explained by social differences, and ethnicity seems to play no additional role. On the other
hand, while access to higher quality schools is strongly related to social differences, Roma students
seem to face additional disadvantages. The results suggest that besides policies that aim at
alleviating poverty, well-designed interventions influencing the mechanisms can also improve the
skill development of Roma and other disadvantaged children.
5 citations
TL;DR: This article examines whether using student-survey data in place of official records data meaningfully biases regression estimates and connects reliability ratios used in labor economics, which are simple ways to adjust for attenuation bias, when needed.
Abstract: The "Lake Wobegon Effect'' describes the potential bias introduced into survey-based analyses of education issues, because students systematically over-report academic achievements such as grade-point average. While the use of official-records data negates this effect, many researchers can only access student-reported data. In this paper we examine whether student-survey data in place of official-records data meaningfully biases regression estimates. We investigate this by capitalizing on a subtle but extremely useful statistical feature of over-reporting on bounded variables like grade-point average. Specifically, the misreports will be negatively correlated with the true grade-point average - a form of non-classical measurement error - which actually counteracts the bias. Around this insight we build a simple testing framework that permits a researcher with access to both data sets to assess the bias's size and significance. We demonstrate our method using two data sets, and find that the bias does not meaningfully impact the signs, significance, or magnitude of regression slope coefficients. Our results, and that the special econometric feature is likely present in all student-reported grade data, lead us to believe the Lake Wobegon Effect bias is inconsequential.
5 citations
TL;DR: In this paper, the authors analyzed the redistributive (dis)advantages of a minimum wage over income taxation in competitive labor markets and proposed a Pareto-improving policy reform for all countries under consideration.
Abstract: We analyze the redistributive (dis)advantages of a minimum wage over income taxation in competitive labor markets. A minimum wage causes more unemployment, but also leads to more skill formation as unemployment is concentrated on low-skilled workers. A simple condition based on three sufficient statistics shows that a minimum wage is desirable if the social welfare gains of more skill formation outweigh the social welfare losses of increased unemployment. Using a highly conservative calibration, a minimum wage decrease is shown to be part of a Pareto-improving policy reform for all countries under consideration, except possibly the United States.
5 citations