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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 used data from the 1991 sweep of the National Child Development Study (NCDS) and the 1998 Labour Force Survey (LFS) to provide a comprehensive analysis of the labour market returns to academic and vocational qualifications.
Abstract: This paper uses data from the 1991 sweep of the National Child Development Study (NCDS) and the 1998 Labour Force Survey (LFS) to provide a comprehensive analysis of the labour market returns to academic and vocational qualifications. The results show that the wage premia from academic qualifications are typically higher than from vocational qualifications. However, this gap is reduced somewhat, when we control for the amount of time taken to acquire different qualifications. This is particularly important for vocational courses, which generally take shorter time periods to complete. In the paper we also investigate how returns vary by gender, subsequent qualifications, and the natural ability of individuals. Finally, by comparing the NCDS results with those from the LFS, we estimate the bias that can result from not controlling for factors such as ability, family background and measurement error. The results reveal that the estimated returns in the NCDS equations controlling for ability, family background and measurement error are similar to the simple OLS estimates obtained with the LFS, which do not control for these factors. This suggests that the biases generally offset one another.
143 citations
TL;DR: The authors argues that inequality has both positive and negative effects, and argues that religious beliefs provide as strong (or weak) a justification for views toward society's implicit welfare function as do philosophical reflections behind a veil of ignorance, and that America has reached a point at which efficiently redistributing income from rich to poor is in the nation's interest.
Abstract: This chapter suggests that inequality has both positive and negative effects. On the positive side, differential rewards provide incentives for individuals to work hard, invest, and innovate. On the negative side, differences in rewards that are unrelated to productivity—those that result from racial discrimination, for example—are corrosive to civil society and cause resources to be misallocated. The chapter argues that, for various reasons elaborated below, all of these forms of inequality are of concern to contemporary American society, and that America has reached a point at which, on the margin, efficiently redistributing income from rich to poor is in the nation's interest. It also argues that religious beliefs provide as strong (or weak) a justification for views toward society's implicit welfare function as do philosophical reflections behind a veil of ignorance. The chapter disputes that inequality could grow so extreme that it eventually jeopardizes any type of "widespread acceptance" of a democratic capitalist society that might be established.
143 citations
TL;DR: This article argued that economic theory has not improved our understanding of intergenerational mobility beyond basic questions of measurement, and the paper by Bowles and Gintis in this issue implicitly concurred with Goldberger.
Abstract: science itself; for example, see Galton's 1869 study of the eminence of relatives or his 1889 analysis of the heights of parents and children. But extensive use of economic theory to interpret these correlations is much more recent. Using basic economic concepts such as supply, demand, investment, incentives, missing markets and so on, theorists hope to explain how and why status is correlated across generations. Economic theory might provide a unified treatment of a variety of socioeconomic indicators?such as earnings, income, occupation or wealth. Or it might predict how taxes, subsidies and economic regulation affect intergenerational mobility and the operation of markets. However, while the subject matter?earnings, consumption, wealth, occupa? tion?is clearly interesting to economists, it could nonetheless be the case that, beyond basic questions of measurement, economic theory has not improved our understanding of intergenerational mobility. Goldberger (1989) is quite explicit in this contention. By emphasizing the distinction between genes and environment and by using statistical theory as its main analytical tool, the paper by Samuel Bowles and Herbert Gintis in this issue implicitly concurs with Goldberger. We take this challenge very seriously. What characterizes an economic approach to mobility? While biologists (and Bowles and Gintis) distinguish "endowments" and "investments" by their source (genetic versus environmental factors), one focus of economic theorists is motiva
142 citations
TL;DR: In this article, the authors revisited the relationship among institutions, human capital, and development, and showed that the impact of institutions on long-run development is robust, whereas the estimates of the effect of human capital are much diminished and become consistent with micro estimates.
Abstract: In this article, we revisit the relationship among institutions, human capital, and development. We argue that empirical models that treat institutions and human capital as exogenous are misspecified, both because of the usual omitted variable bias problems and because of differential measurement error in these variables, and that this misspecification is at the root of the very large returns of human capital, about four to five times greater than that implied by micro (Mincerian) estimates, found in the previous literature. Using cross-country and cross-regional regressions, we show that when we focus on historically determined differences in human capital and control for the effect of institutions, the impact of institutions on long-run development is robust, whereas the estimates of the effect of human capital are much diminished and become consistent with micro estimates. Using historical and cross-country regression evidence, we also show that there is no support for the view that differences in the ...
141 citations
TL;DR: In this article, the authors exploit a natural experiment to study the influence of regional factors on initial and subsequent location choices among immigrants, finding that immigrants to Sweden are attracted to regions with high representation from the individual's birth country and large overall immigrant populations.
141 citations