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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 paper examined the effects of work experience acquired while youth were in high school (and college) on young men's wage rates and found that the estimated returns to working while in either high school or college are dramatically diminished in magnitude and are not statistically significant when one applies dynamic selection methods.
Abstract: This paper examines the effects of work experience acquired while youth were in high school (and college) on young men's wage rates. Previous studies have found sizeable and persistent rates of return to working while enrolled in school, especially high school, on subsequent wage growth. We evaluate the extent to which these estimates represent causal effects by assessing the robustness of prior findings to controls for unobserved heterogeneity and sample selectivity. We explore more-general econometric methods for dealing with the dynamic of selection and apply them to data on young men from the 1979 National Longitudinal Survey of Youth (NLSY79). We find that the estimated returns to working while in high school or college are dramatically diminished in magnitude and are not statistically significant when one applies dynamic selection methods.
153 citations
TL;DR: This article developed a model of human capital formation with endogenous labor supply and heterogeneous agents to explore the optimal level of education subsidies along with the optimal schedule of the labor income tax and showed that subsidies on education ensure efficiency in human capital accumulation and labor taxes are more progressive than without education policies.
Abstract: We develop a model of human capital formation with endogenous labor supply and heterogeneous agents to explore the optimal level of education subsidies along with the optimal schedule of the labor income tax. If the government can observe inputs into the production of human capital, subsidies on education ensure efficiency in human capital accumulation and labor taxes are more progressive than without education policies. Although the able benefit more than proportionally from education subsidies, education subsidies thus play an important role in alleviating the tax distortions in human capital accumulation induced by redistributive policies. If the government can not verify all investments in human capital, education policy offsets some but not all the tax-induced distortions on learning.
152 citations
01 Jan 2012
TL;DR: This article found that the provision of mother tongue education led to an increase of 0.75 to 1 year of primary schooling in the largest ethnic group in the country and that the entire increase in the years of schooling can be attributed to the intensive margin of education.
Abstract: The extensive use of foreign languages in schooling might have an important role to
play in the poor educational outcomes observed on the African continent. Exploiting the language
policy change of 1994 in Ethiopia as a natural experiment, we estimate the effects of provision of
mother tongue instruction on the largest ethnic group in the country. Our results suggest that
provision of mother tongue education led to an increase of 0.75 to 1 year of primary schooling in the
a....ected cohort. Moreover the entire increase in the years of schooling can be attributed to the
intensive margin of education. The language policy change, conditional on enrolment, increased the
percentage of people completing 6 years or more of schooling by 31%. Applying our findings to a set
of African countries shows that even after accounting for the costs of provision, introduction of
mother tongue instruction imply potentially large benefits and increases the percentage of population
completing primary schooling by as much as 15% points. These finding have important policy
implications at a time when surging enrolment rates and already stretched educational budgets in the
African continent imply need for solutions which can increase the quality of education without
requiring huge capital or infrastructural outlays.
150 citations
TL;DR: In a recent survey of the literature, Belzil et al. as mentioned in this paper found that more than 200 articles or working papers have been devoted to the estimation of the return to schooling or surrounding issues.
Abstract: IN THE EMPIRICAL LITERATURE, it is customary to estimate the return to schooling by ordinary least squares (OLS) or Instrumental Variable (IV) techniques.2 The choice of OLS is justified only if realized schooling and unobserved labor market ability are uncorrelated. If not, OLS estimates suffer the "Ability Bias" and other estimation methods, such as IV, may be used. The volume of work devoted to the return to schooling is a good indication of the importance of this topic as perceived by economists.3 Frequently, instrumental variables (IV) techniques are applied in a context where the instrument is only weakly correlated with schooling attainments (Staiger and Stock (1997)). As a consequence, the validity of very high returns to schooling, reported in a simple regression framework, should be seriously questioned; see Manski and Pepper (2000).4 When IV techniques are chosen, the log wage regression is usually assumed to be linear in schooling. However, there is no obvious reason to presume that the local returns to schooling are independent of grade level. Indeed, heterogeneity in any component of schooling choices (subjective discount rates, ability or specific taste for schooling) will lead to improper inference if the local returns are erroneously assumed to be constant. As individuals with lower taste for schooling tend to stop school earlier, OLS (or IV) estimates of the return to schooling, which impose equality between local and average returns at all levels of schooling, will be strongly affected by the relative frequencies of individuals with high and low taste for schooling. More precisely, if there are large differences in local returns between various grade levels, the OLS estimate (measuring an average log wage increment per year of schooling) will tend to be biased toward the co-editor and three anonymous referees for comments and suggestions on this version or earlier versions. Belzil thanks the Social Sciences and Humanities Research Council of Canada for generous funding. The usual disclaimer applies. 2 To use the same terminology as in the reduced-form literature, the return (local) to schooling refers to the percentage wage increase per additional year of schooling. In the paper, the terms local and marginal returns may be used interchangeably. The average return refers to the slope of the straight line between the intercept and the expected log wage at a given number of years of schooling. 3 A World Wide Web survey of the most recent literature indicates that, since 1970, more than 200 published articles or working papers (set in a reduced-form) have been devoted to the estimation of the return to schooling or surrounding issues. Very often, studies based on IV methods conclude that the returns to schooling can be between 20% and 40% above the OLS estimates. Reported estimates around 15% per year (for the US) are not uncommon although standard errors are typically very high. See Card (1999) for a survey. 4 Manski and Pepper (2000) obtain upper bound estimates of the return to schooling from a sample taken from the NLSY. Their results cast doubts on the high returns reported in the literature.
148 citations
TL;DR: The results confirm the persistent positive effects of higher education on earnings over different stages of the work career and over a lifetime, but also reveal notably smaller net effects on lifetime earnings compared with previously reported estimates.
Abstract: Differences in lifetime earnings by educational attainment have been of great research and policy interest. Although a large literature examines earnings differences by educational attainment, research on lifetime earnings—which refers to total accumulated earnings from entry into the labor market until retirement—remains limited because of the paucity of adequate data. Using data that match respondents in the Survey of Income and Program Participation to their longitudinal tax earnings as recorded by the Social Security Administration, we estimate the 50-year work career effects of education on lifetime earnings for men and women. By overcoming the purely synthetic cohort approach, our results provide a more realistic appraisal of actual patterns of lifetime earnings. Detailed estimates are provided for gross lifetime earnings by education; net lifetime earnings after controlling for covariates associated with the probability of obtaining a bachelor’s degree; and the net present 50-year lifetime value of education at age 20. In addition, we provide estimates that include individuals with zero earnings and disability. We also assess the adequacy of the purely synthetic cohort approach, which uses age differences in earnings observed in cross-sectional surveys to approximate lifetime earnings. Overall, our results confirm the persistent positive effects of higher education on earnings over different stages of the work career and over a lifetime, but also reveal notably smaller net effects on lifetime earnings compared with previously reported estimates. We discuss the implications of these and other findings.
148 citations