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The causal effect of education on earnings

01 Jan 1999-Handbook of Labor Economics (Elsevier)-pp 1801-1863
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 authors used a sample of more than 200 metropolitan areas in the United States over the years 1980, 1990, and 2000 to investigate the relationship between population growth and human capital growth.
Abstract: Growth of human capital, defined as the change in the fraction of a metropolitan area’s labor force with a bachelor’s degree, is typically viewed as generating a number of desirable outcomes, including economic growth. Yet, in spite of its importance, few empirical studies have explored why some economies accumulate more human capital than others. This paper attempts to do so using a sample of more than 200 metropolitan areas in the United States over the years 1980, 1990, and 2000. The results reveal two consistently significant correlates of human capital growth: population and the existing stock of college-educated labor. Given that population growth and human capital growth are both positively associated with education, these results suggest that the geographic distributions of population and human capital should have become more concentrated in recent decades. That is, larger, more-educated metropolitan areas should have exhibited the fastest rates of increase in both population and education and thus “pulled away” from smaller, less-educated metropolitan areas. The evidence largely supports this conclusion.

2 citations

Posted Content
TL;DR: Hanushek et al. as discussed by the authors presented basic evidence about the very substantial impacts of school quality on individual earnings, on economic growth, and local economic development, and emphasized how benefits relate to both the magnitude and the speed of quality improvements.
Abstract: This paper presents basic evidence about the very substantial impacts of school quality on individual earnings, on economic growth, and local economic development. The calculations emphasize how benefits relate to both the magnitude and the speed of quality improvements. * Hoover Institution, Stanford University; University of Texas at Dallas; and National Bureau of Economic Research. This research was supported by the Packard Humanities Institute and The Teaching Commission. The Economic Value of Improving Local Schools By Eric A. Hanushek Local civic leaders intuitively understand that education is good and that the quality of schools may in one way or another relate to local development. The arguments, however, tend to be general. They are linked only imprecisely to the impacts of schooling on the economy and to ways of improving the schools. This paper discusses what is known about the economic value of better schools and then puts those values into the perspective of school reform actions – particularly actions to improve the quality of teachers. One important aspect of the discussion is how educational reform fits into notions of local economic development. What we know about the economics of school quality fits more into discussions of national outcomes, which may differ from local outcomes. An attempt is made to put this into the context of a more local economy. The findings about the importance of school quality are particularly relevant in the context of U.S. accountability policies that emphasize performance on standardized tests in core areas. Some people have suggested that the achievement emphasized by current state accountability systems is not very important and that other aspects of student performance – creativity, the ability to work in teams, or personality traits – should be the focus of attention. While these other aspects are undoubtedly valuable, the analysis here strongly affirms an emphasis on basic cognitive skills by demonstrating its substantial economic returns. Most consideration of economic aspects of education has naturally concentrated on school attainment, or the quantity of education. It is easy to calculate the economic return on such an investment – both the costs and benefits are fairly clear. Additionally, until recently, relatively limited data have been available on the quality of schools. Finally, there are great

2 citations

Posted Content
TL;DR: This paper reviewed the stylized facts regarding the distribution of human capital investments and the returns to those investments in developing countries and examined recent evidence regarding which policies can induce increased human capital investment in the most efficient manner using estimated benefits and costs as a guide.
Abstract: This paper reviews the stylized facts regarding the distribution of human capital investments and the returns to those investments in developing countries. It then examines recent evidence regarding which policies can induce increased human capital investments in the most efficient manner, using estimated benefits and costs as a guide.

2 citations

Posted Content
TL;DR: In this article, the authors explore how the specification of the earnings function impacts the optimal tax treatment of human capital and identify the exact conditions under which these two effects cancel and education should be neither taxed nor subsidized.
Abstract: This paper explores how the specification of the earnings function impacts the optimal tax treatment of human capital. If education is complementary to labor effort, education should be subsidized to offset tax distortions on labor supply. However, if most of the education is enjoyed by high ability households, education should be taxed in order to redistribute resources to the poor. The paper identifies the exact conditions under which these two effects cancel and education should be neither taxed nor subsidized. In particular, with non-linear tax instruments, education should be weakly separable from labor and ability in the earnings function. With linear taxes, education should also feature a constant elasticity in a weakly separable earnings function.

2 citations

01 Jan 2006
TL;DR: In this paper, the authors use data from Finnish polytechnic reform to distinguish between human capital and signaling theories of the value of education, and conclude that education has both human and signaling value.
Abstract: We use data from Finnish polytechnic reform to distinguish between human capital and signaling theories of the value of education. The polytechnic reform took place gradually over the 1990s eventually upgrading all vocational colleges to polytechnics. The reform extended the length of education and created a completely new set of degree titles distinguishing the polytechnic graduates from the earlier graduates from the same schools. While both human capital and signaling theories predict that earnings are higher for those with higher level of education, their predictions differ in respect to what happens to those who graduate from schools that still are vocational colleges after polytechnics graduates start entering the labor market. We find that the reform decreased the relative earnings of vocational college graduates as predicted by the signaling model. We also reject the predictions of “pure” signaling model, and conclude that education has both human capital and signaling value. According to our best estimates, approximately 56 percent of the return to additional education due to the polytechnic reform reflects the effect of education on productivity and the remaining 44 percent its signaling value.

2 citations