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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: The authors found support for the safety valve role of vocational schooling, with a small increase in vocational enrollment in response to grade failure, compared to a decline of 38 percentage points for academic enrollment.
Abstract: As an alternative to traditional academic schooling, vocational schooling in South Africa may serve as a safety valve for students encountering difficulty in the transition from school to work. Yet if ineffective, vocational schooling could also be a sinkhole, offering little chance for success on the labor market. After defining the terms "safety valve" and "sinkhole" in a model of human capital investment with multiple schooling types, I test for evidence of these characteristics using a panel of urban youth in South Africa. I find support for the safety valve role of vocational schooling, with a small increase in vocational enrollment in response to grade failure, compared to a decline of 38 percentage points for academic enrollment. In contrast, I find no evidence that vocational schooling is a sinkhole, with wage and employment returns at least as large as those for academic schooling. The results suggest that vocational schooling plays an important role in easing difficult school to work transitions for South African youth.
TL;DR: This article examined the impact of education on the age earnings profiles of self-employed Bangladeshi men, using data from a survey carried out by the first author in 2010, and found that educational attainment and on-the-job experience are strongly complementary rather than mutually substitutable in increasing the likelihood of achieving a high income level.
Abstract: This paper examines the impact of education on the age earnings profiles of self-employed Bangladeshi men, using data from a survey carried out by the first author in 2010. Its results strongly support the perception that educational attainment and on-the-job experience are strongly complementary rather than mutually substitutable in increasing the likelihood of achieving a high income level. Yet the high degree of earnings heterogeneity among well-educated respondents in the sample also indicates that academic excellence is a catalyst but not a guarantor for entrepreneurial success, and that levels of education that are formally equivalent may nevertheless have very different implications for the likelihood of prosperity in business.
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TL;DR: In this article, the Mincer model was used to estimate the return to education in Mexico by means of the natural ability bias that the literature reports in this type of estimations is tried to be solved using the control function method.
Abstract: This paper estimates private returns to education in Mexico by means of the Mincer model. The natural ability bias that the literature reports in this type of estimations is tried to be solved using the control function method. Through this method some variables relevant to wage determination are included in the model, such as natural ability index, mother's education, household infrastructure, height and health. Results suggest that the returns to education by year of schooling in Mexico are between 8.2 % and 8.4 %. On the other hand, results by level of education suggest that more education is associated with higher returns. The highest return to education in both absolute and relative terms is provided by Postgraduate education followed by Graduate education. In general, results suggest that there is a convex relationship between education level and wage.