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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 the context of a transitional economy, these dramatic changes raise a number of issues about the direction of the urban labor market as discussed by the authors, and a key aspect to be explored is whether the labor market has become market oriented and whether enterprises with different ownerships operate competitively.
Abstract: Introduction Three decades of economic reform have brought tremendous changes in every sector of the Chinese economy. The labor market is no exception, and it was particularly affected by important policy and institutional changes at the turn of the century. On the one hand, the state-sector reform was accelerated after the Chinese Communist Party's Fifteenth National Congress (September 1997), which encouraged both the corporatization of large state-owned enterprises (SOEs) and the restructuring of small SOEs. On the other hand, the Congress also recognized private enterprises as an important component of the economy and placed an emphasis on rule of law. As a direct consequence, the urban labor market was reshaped due to the unprecedented growth in unemployment and the reallocation of labor from the public to the private sector. At the same time, competition among workers in the urban labor market increased sharply due to the massive rural labor-force exodus, which led to an estimated 140 million rural workers in the cities by 2008. In the context of a transitional economy, these dramatic changes raise a number of issues about the direction of the urban labor market. A key aspect to be explored is whether the labor market has become market oriented and whether enterprises with different ownerships operate competitively. Academic research using data collected from the mid-1990s to the early twenty-first century highlights the incompleteness of the reforms and the “unfinished economic revolution” (Lardy 1998), as well as the remaining rigidities in a segmented labor market with distinct rules for wage determination and limited labor mobility between segments (e.g., Chen, Demurger, and Fournier 2005; Demurger et al. 2006; Dong and Bowles 2002; Knight and Song 2003; Wang 2005).
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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, and results at the margin of the two medium tracks show no effect on educational attainment.
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. Results at the margin of the two medium tracks show no effect on educational attainment, and decreases in wage of around 12% from attending the higher track. 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.
3 citations
Posted Content•
TL;DR: In this article, the authors investigated the effect of gender on returns to the investment in education for men and women with disabilities in Metro Manila of the Philippines, using a unique dataset of persons with hearing, physical and visual impairments, including continuous and discontinuous functions and quantile regression to reveal the effects of gender within disabilities.
Abstract: In this paper, we investigate the effect of gender on returns to the investment in education for men and women with disabilities in Metro Manila of the Philippines. By using a unique dataset of persons with hearing, physical and visual impairments, we employ three methodological strategies on earning functions, including continuous and discontinuous functions and quantile regression to reveal the effects of gender within disabilities. Our estimation suggests that women with disabilities face several disadvantages in the labor markets of the Philippines where gender equality in general is observed for women without disabilities. After controlling for a sample selection to account for endogenous labor participation, as well as endogeneity of schooling decisions, the estimated rate of returns to education is very high, ranging from 24.9 to 38.4%. However, when classifying each disability dummy variable for each gender, the effect of double disadvantage (gender and disability) is observable. Additionally, checking the possibility of nonlinear schooling returns, we also find that the effect of disability for women is more severe than for their male counterparts. From these findings, we cannot reject the possibility that obtaining a diploma serves signaling as their ability level for women with disabilities.
3 citations
01 Jan 2002
TL;DR: In this paper, the authors investigate the amount of bias that result from violations of the normality assumption in the covariate distribution in a polynomial regression model with measurement error and show that the bias reacts only mildly to slight deviations from normality.
Abstract: The structural variant of a regression model with measurement error is characterized by the assumption of an underlying known distribution type of the latent covariate. Several estimation methods, like regression calibration or structural quasi score estimation, take this distribution into account. In the case of a polynomial regression, which is studied here, structural quasi score takes the form of structural least squares (SLS). Usually the underlying latent distribution is assumed to be the normal distribution because then the estimation methods take a particularly simple form. SLS is consistent as long as this assumption is true. The purpose of the paper is to investigate the amount of bias that result from violations of the normality assumption in the covariate distribution. Deviations from normality are introduced by switching to a mixture of normal distributions. It turns out that the bias reacts only mildly to slight deviations from normality.
3 citations
01 Jan 2001
TL;DR: The authors used pseudo-panel methods to estimate returns to different levels of education, and investigated the labour market impact of trade liberalisation in Brazil, finding that both traded and non-traded sectors experienced a squeeze in wages in the period immediately after trade reform.
Abstract: This paper uses pseudo-panel methods to estimate returns to different levels of education, and investigates the labour market impact of trade liberalisation. We focus on wages and the returns to education before and after trade liberalisation in Brazil. The case of Brazil is particularly well-suited for such an investigation because a substantial and widespread trade liberalisation took place over a relatively short period of time in the early 1990s. Moreover, a long and reliable series of individual-level cross-section surveys (PNADs) is available, covering the periods before, during and after trade reform. We match the PNAD data with trade data at the two-digit industrial classification level, and construct a pseudo-panel, with observations defined by 31 twodigit industries and 7 (grouped) years-of-birth cohorts. We find that pseudo-panel estimates of education returns are lower than estimates obtained by OLS, possibly indicating omitted ability bias. Our results also indicate that there were significant changes in wages, and in the returns to education in the period after trade liberalisation. These changes were evident in both traded and non-traded sectors suggesting important spill-over effects. Conditional on the changing level of education, both traded and non-traded sectors experienced a squeeze in wages in the period immediately after trade reform, with some compression of the skilled wage premium especially at the very top of the distribution. Subsequently, there has been some recovery in wages, especially in the non-traded sector, reversing much of the previous fall. [239 words]
3 citations