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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 this article, the authors assess the current state of empirical knowledge, and gaps in that knowledge, on educational incentives and inputs in developing countries as related to such questions, and assess the benefits relative to the resource costs of alternative policies for improving educational inputs.
Abstract: From the point of view of economic development, education is the acquisition of knowledge and skills through experiences from conception onwards over the life cycle that increase productivity broadly defined. Education can occur through, but is not limited to, formal educational activities such as preschool programs, schools, and formal training programs. The proximate determinants of education are experiences or inputs into knowledge and skills production functions. Within a dynamic forward-looking model of human capital investments, these experiences are determined sequentially by a series of family or individual decisions given past, current and expected future resources, markets, policies, and other institutions. The context in which these microinvestment demands are made, in turn, reflects decisions of suppliers of services that are explicitly related to education as well as of options that may be importantly related to education through other experiences, such as in labor markets. To understand the nature of inputs and incentives related to education in developing countries, attention must be paid to both the demand and the supply sides for investments in education, both of which are conditioned significantly by policy choices. Therefore, there are numerous important policy questions related to educational inputs and incentives. What are critical inputs into different educational processes? How important are various incentives for improving these inputs? How effective are various demand-side policies versus supply-side policies? How important are policies that have direct impact on input decisions versus policies that alter longer-run incentives to invest in current education through altering expected longer-run returns from such investments? What are the benefits relative to the resource costs of alternative policies for improving educational inputs? This chapter assesses the current state of empirical knowledge, and gaps in that knowledge, on educational incentives and inputs in developing countries as related to such questions.
73 citations
TL;DR: In this paper, the authors discuss three different approaches that do not require the availability of observed instrumental variables: the higher moments estimator, the identification trough Heteroscedasticity (IH) estimator and the Latent Instrumental Variable (LIV) approach.
Abstract: A review of the econometric literature on instrumental variables (IV) estimation shows that the performance of traditional IV estimation relies critically on the quality of the instruments. We discuss three different approaches that do not require the availability of observed instrumental variables: the ‘Higher Moments’ (HM) estimator, the ‘Identification trough Heteroscedasticity’ (IH) estimator, and the ‘Latent Instrumental Variable’ (LIV) approach. These methods attempt to identify the regression parameters not through observed instruments but by using other information that enables identifiability. The performance of these methods is illustrated on simulated and empirical data. Copyright © 2009 John Wiley & Sons, Ltd.
73 citations
15 Dec 2010
TL;DR: In this paper, the authors used an instrumental variables technique to estimate formal schooling's causal effect on adult health in Sweden and found that the additional schooling generated by Sweden's compulsory school reform produces improved adult health.
Abstract: Understanding health determinants and exactly how they affect health is an important social policy question. Empirical tests in the health literature typically find that the number of years of formal schooling completed is the most important correlate of good health. However, there is less consensus as to whether this correlation reflects a causal relationship between more schooling and better health. This chapter capitalizes on a unique social experiment: the 1950 Swedish comprehensive school reform, which was implemented in stages and by municipal areas, through which people born between 1945 and 1955 went through two different school systems (one of which required at least one more year of schooling). It uses an instrumental variables technique to estimate formal schooling's causal effect on adult health in Sweden. The instrumental variable for degree of education (schooling) generated from compulsory school reform yields a consistent estimate of education's causal impact on health, as measured by an bad health index and of body mass index in the healthy range. The additional schooling generated by Sweden's compulsory school reform produces improved adult health (controlling for cohort and county effects, family background characteristics, and individual income).
73 citations
TL;DR: The authors showed that a program that provides scholarships to poor students had a large effect on school enrollment and attendance, which increased by approximately 25 percentage points, but there was no evidence that, 18 months after the scholarships were awarded, recipient children did any better on mathematics and vocabulary tests than they would have in the absence of the program.
Abstract: There is a strong association between schooling attained and test scores in many settings. If this association is causal, one might expect that programs that increase school enrollment and attainment would also improve test scores. However, if there is self-selection into school based on expected gains, marginal children brought into school by such programs may be drawn disproportionately from the left-hand side of the ability distribution, which could limit the extent to which additional schooling translates into more learning. To test this proposition, this paper uses data from Cambodia. The results show that a program that provides scholarships to poor students had a large effect on school enrollment and attendance, which increased by approximately 25 percentage points. However, there is no evidence that, 18 months after the scholarships were awarded, recipient children did any better on mathematics and vocabulary tests than they would have in the absence of the program. The paper discusses results that suggest that the self-selection of lower-ability students into school in response to the program is an important part of the explanation. The analysis also shows minimal program effects on other outcomes, including knowledge of health practices, expectations about the future, and adolescent mental health.
73 citations
01 Jan 2006
TL;DR: The authors examined the potential importance of discrimination against skilled black workers, changes in black family structures and differences in parenting norms as factors that may contribute to the recent stability of black-white skill gaps.
Abstract: All data sources indicate that black–white skill gaps diminished over most of the 20th century, but black–white skill gaps as measured by test scores among youth and educational attainment among young adults have remained constant or increased in absolute value since the late 1980s. I examine the potential importance of discrimination against skilled black workers, changes in black family structures, changes in black household incomes, black–white differences in parenting norms, and education policy as factors that may contribute to the recent stability of black–white skill gaps. Absent changes in public policy or the economy that facilitate investment in black children, best case scenarios suggest that even approximate black–white skill parity is not possible before 2050, and equally plausible scenarios imply that the black–white skill gap will remain quite significant throughout the 21st century.
73 citations