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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 impact of different policies on the investment of families in the education of their children is analyzed, where families make decisions on the level of human capital of their offspring with a view to the future income that this capital will entail.
Abstract: We analyze in this working paper the impact of different policies on the investment of families in the education of their children. In the model we present, families make decisions on the level of human capital of their offspring with a view to the future income that this capital will entail (under the assumption that higher education levels yield higher expected income). Families optimal investment in education depends on their preferences (summarized by their time discount and risk aversion parameters) and their circumstances (initial wealth, parents education, and children s natural abilities). The public authority designs a balanced tax/subsidy scheme in order to maximize aggregate welfare. We compare the case of a purely utilitarian planner with one that cares about the equality of opportunity.
4 citations
16 Jun 2011
TL;DR: In this paper, the authors study nonclassical measurement error in the continuous dependent variable of a semiparametric transformation model and develop a framework to identify and consistently estimate the parameter vector of the transformation model.
Abstract: In this paper, we study nonclassical measurement error in the continuous dependent variable of a semiparametric transformation model. The latter is a popular choice in practice nesting various nonlinear duration and censored regression models. The main complication arises because we allow the (additive) measurement error to be correlated with a (continuous) component of the regressors as well as with the true, unobserved dependent variable itself. This problem has not yet been studied in the literature, but we argue that it is relevant for various empirical setups with mismeasured, continuous survey data like earnings or durations. We develop a framework to identify and consistently estimate (up to scale) the parameter vector of the transformation model. Our estimator links a two-step control function approach of Imbens and Newey (2009) with a rank estimator similar to Khan (2001) and is shown to have desirable asymptotic properties. We prove that `m out of n' bootstrap can be used to obtain a consistent approximation of the asymptotic variance and study the estimator's nite sample performance in a Monte Carlo Simulation. To illustrate the empirical usefulness of our procedure, we estimate an earnings equation model using annual data from the Health and Retirement Study (HRS). We find some evidence for a bias in the coefficients of years of education and age, emphasizing once again the importance to adjust for potential measurement error bias in empirical work.
4 citations
TL;DR: This article examined why women are more educated than men in a rural, agricultural economy in which women are significantly less likely than men to participate in the labor market and hypothesize that educational homogamy in the marriage market and crossproductivity effects in the household allow Filipino women to reap substantial benefits from schooling regardless of whether they enter the labour market.
Abstract: Using data from the Bicol region of the Philippines, we examine why women are more educated than men in a rural, agricultural economy in which women are significantly less likely than men to participate in the labor market. We hypothesize that educational homogamy in the marriage market and cross-productivity effects in the household allow Filipino women to reap substantial benefits from schooling regardless of whether they enter the labor market. Our estimates reveal that the return to schooling for women is approximately 20 percent in both labor and marriage markets. In comparison, men experience a 12 percent return to schooling in the labor market. By using birth order, sibship size, percent of male siblings, and parental education as instruments, we correct for a significant downward bias that is caused by the endogeneity of schooling attainment.
4 citations
01 Oct 2020
TL;DR: In this paper, the authors investigated the trade-off between returns to education and risks concerning those returns: higher risks are generally associated with higher returns, and they found statistically significant impacts for the higher moments: skewness and kurtosis.
Abstract: In the traditional human capital framework, education is often considered as an investment, rather than consumption, while consumption is not necessarily precluded. Whether education is an investment is empirically unclear and relatively under-explored. We shed light on this issue by estimating the risk–return trade-off in the context of education. If education is indeed an investment, risk could play an important role in individual educational decisions just as with risky assets. As portfolio theory predicts, there could be a trade-off between returns to education and risks concerning those returns: higher risks are generally associated with higher returns. We contribute to the literature by proposing various measures of risk based on the entire distribution of returns to education recovered by our nonparametric models. Our results confirm a trade-off between returns and variance. We also found statistically significant impacts for the higher moments: skewness and kurtosis. Interestingly, we found the relationship between mean returns and variance to be linear, and the relationship between expected returns and higher-moments (skewness and kurtosis) is non-linear.
4 citations
Journal Article•
TL;DR: In this paper, the authors examined the relationship between youth aptitude and adulthood income using the National Longitudinal Survey of the Youth 1979 cohort and OLS regression analysis, and found that a higher 1981 Armed Forces Qualifications Test (AFQT) score is directly related to a higher income in 2010, ceteris paribus.
Abstract: I examine the relationship between youth aptitude and adulthood income. Using the National Longitudinal Survey of the Youth 1979 cohort and OLS regression analysis, I test the hypothesis that a higher 1981 Armed Forces Qualifications Test (AFQT) score is directly related to a higher income in 2010, ceteris paribus. First, a single regression equation is run for educational attainment subgroups at the time of taking the AFQT. Second, a regression equation including total lifetime educational attainment, and one that excludes it, are run to examine potential co-linearity between AFQT score and educational attainment. The results show that AFQT is significant and positively related to adulthood income.
4 citations