The external returns to education: UK evidence using repeated cross-sections

Augmenting a Mincerian earnings function with industry level data we estimate the external return to schooling for a repeated cross-section of individuals in the UK over the period 1994–2004. For men age 30–49 we find that a one year increase in the industry average level of schooling is associated with an increase in individual wages of 2.6 to 3.9%, around 2 to 3 fifths of the private return to schooling. We illustrate the sensitivity of external return estimates to industry ICT use and union density, and individuals' own level of schooling.     

Estimates of the return to schooling and ability: evidence from sibling data

We use sibling data on wages, schooling, and aptitude test scores from the 1979 National Longitudinal Survey of Youth (NLSY79) to obtain OLS, family fixed effects, and fixed effects instrumental variable estimates of the return to schooling for a large sample of non-twin siblings. Following recent studies that use identical twin samples, we use sibling-reported schooling as an instrument for self-reported schooling. Controlling for aptitude test scores has a substantial impact on estimated returns to schooling even within families, and there is a large return to test scores that is comparable in size within and between families. We also find that the return to schooling is higher for older brothers than for younger brothers and for women than men. Finally, because the NLSY79 contains multiple sibling reports of education for the same individual, we are able to test and reject the overidentifying restrictions for the validity of sibling-reported schooling as an instrumental variable.     

Estimating the returns to education for Australian youth via rank-order instrumental variables

This paper employs the rank-order instrumental variable (IV) procedure of Vella and Verbeek [Vella, F., Verbeek, M., 1997. Using rank order as an instrumental variable: an application to the return to schooling, CES Discussion Paper 97.10, K.U. Leuven.] to estimate the returns to education for Australian youth. The attraction of this approach is that it can account for the endogeneity of schooling in the wage equation via the use of instrumental variables without the use of exclusion restrictions. We find, after accounting for the endogeneity of schooling, that an additional year of schooling is associated with an increase in wages of approximately 8%. Furthermore, we find that the rank-order IV approach is able to identify the presence of endogeneity in this particular empirical example. However, despite this, the adjusted estimate of how schooling affects wage is close to the ordinary least squares (OLS) estimate.     

Bayesian inference in a correlated random coefficients model: Modeling causal effect heterogeneity with an application to heterogeneous returns to schooling

We consider the problem of causal effect heterogeneity from a Bayesian point of view. This is accomplished by introducing a three-equation system, similar in spirit to the work of Heckman and Vytlacil (1998), describing the joint determination of a scalar outcome, an endogenous “treatment” variable, and an individual-specific causal return to that treatment. We describe a Bayesian posterior simulator for fitting this model which recovers far more than the average causal effect in the population, the object which has been the focus of most previous work. Parameter identification and generalized methods for flexibly modeling the outcome and return heterogeneity distributions are also discussed.Combining data sets from High School and Beyond (HSB) and the 1980 Census, we illustrate our methods in practice and investigate heterogeneity in returns to education. Our analysis decomposes the impact of key HSB covariates on log wages into three parts: a “direct” effect and two separate indirect effects through educational attainment and returns to education. Our results strongly suggest that the quantity of schooling attained is determined, at least in part, by the individual’s own return to education. Specifically, a one percentage point increase in the return to schooling parameter is associated with the receipt of (approximately) 0.14 more years of schooling. Furthermore, when we control for variation in returns to education across individuals, we find no difference in predicted schooling levels for men and women. However, women are predicted to attain approximately 1/4 of a year more schooling than men on average as a result of higher rates of return to investments in education.     

The effects of families and ability on men's education and earnings in Britain

The paper estimates the returns to education for a cohort of men born in Britain in March 1958 who have been followed since birth until the age of 33. The data used has a wealth of information on family background including parental education, social class and interest shown in the child's education as well as measures of ability. These variables are typically missing in studies looking at the returns to schooling. In the paper, we find that the average return to an additional year of full-time education for the UK men is somewhere around 5 1/2% to 6% even after correcting for the effects of measurement error. The paper also presents evidence that the returns to an additional year of schooling in the UK are heterogeneous. In particular, the paper finds some evidence that men with lower tastes for education, have significantly higher marginal returns to education. The results of the paper suggest that recent IV estimates of the returns to schooling in the UK, which exceed typical OLS estimates, may overestimate the average marginal return for the population of men as a whole.     

Average and Marginal Returns to Upper Secondary Schooling in Indonesia

This paper estimates average and marginal returns to schooling in Indonesia using a semiparametric selection model. Identification of the model is given by geographic variation in access to upper secondary schools. We find that the return to upper secondary schooling varies widely across individuals: it can be as high as 50% per year of schooling for those very likely to enroll in upper secondary schooling, or as low as ?10% for those very unlikely to do so. Average returns for the student at the margin are substantial, but they are also well below those for the average student attending upper secondary schooling. Copyright © 2016 John Wiley & Sons, Ltd.     

Impact of mortality reductions on years of schooling and expected lifetime labor supply

Hazan (2009) performs empirical analysis based on the conjecture that a necessary condition for mortality decline to cause longer years of schooling is that it also increases expected lifetime labor supply, and reaches controversial conclusions. We aim to examine the theoretical validity of Hazan’s (2009) conjecture, and more generally, to understand the relation between these two conditions in a standard life-cycle model. We find that the relation between the effects on optimal years of schooling and expected lifetime labor supply differs systematically with respect to mortality reductions at different stages of the life cycle. Based on these systematic differences, we find that longer lifetime labor supply is not sufficient for increased years of schooling for all mortality reductions occurring during the schooling phase, and not necessary for increased years of schooling for some mortality reductions during the working phase.     

Are Returns to Schooling Concentrated Among the Most Able? A Semiparametric Analysis of the Ability–earnings Relationships1

In this paper I explore the relationship between ability and log waves using flexible estimation techniques. I find evidence of nonlinearities in these relationships that vary across levels of schooling, and argue that ability‐sorting into higher education creates problems for accurately identifying the return to schooling over the entire ability support. Over an ability support that is “common” to those with and without a college education, I find that the college log wage premium is incerasing for the more able, and this premium grew during the period 1984–1994 for individuals at all points in the ability distribution. The growth of this wage premium over time also appears to have followed a “smoother” linear path for high‐ability individuals than individuals of lower ability.     

Multidimensional skills and the returns to schooling: Evidence from an interactive fixed-effects approach and a linked survey-administrative data set

This paper presents new evidence on returns to schooling based on an interactive fixed-effects framework that allows for multiple unobserved skills with potentially time-varying prices as well as individual-level heterogeneity in returns. This constitutes a substantive generalization of most existing approaches. Our empirical analysis employs a unique linked survey-administrative panel data set on education and earnings. We find average marginal returns to schooling of about 2.8–4.4% relative to least squares/instrumental variable estimates between 7.7% and 12.7%. Omitted ability accounts for a larger fraction of the aggregate least squares bias compared to heterogeneity. We also find considerable heterogeneity in individual returns.     

Low Wage Returns to Schooling in a Developing Country: Evidence from a Major Policy Reform in Turkey

In this paper, we estimate returns to schooling for young men and women in Turkey using the exogenous and substantial variation in schooling across birth cohorts brought about by the 1997 reform of compulsory schooling within a fuzzy regression discontinuity design. We estimate that the return from an extra year of schooling is about 7–8% for women and an imprecisely estimated 2–2.5% for men. The low level of the estimates for men contrasts starkly with those estimated for other developing countries. We identify several reasons why returns to schooling are low for men and why they are higher for women in our context. In particular, the policy alters the schooling distributions of men and women differently, thus the average causal effect puts a higher weight on the causal effect of schooling at higher grade levels for women than for men.     

Educational mismatch,wages, and wage growth: Overeducation in Sweden, 1974–2000

We examine the impact of educational mismatch on wages and wage growth in Sweden. The empirical analyses, based on cross-sectional and panel data from the Level of living surveys 1974–2000, are guided by two main hypotheses: (a) that educational mismatch reflects human capital compensation rather than real mismatch, and (b) that educational mismatch is real but dissolves with time spent in the labour market, so that its impact on wages tends toward zero over a typical worker's career. Our findings do not support these hypotheses. First, significant differences in contemporaneous economic returns to education across match categories remain even after variations in ability are taken into account. Second, we find no evidence that the rate of wage growth is higher among overeducated workers than others. Our conclusion is that the overeducated are penalized early on by an inferior rate of return to schooling from which they do not recover.     

A review of estimates of the schooling/earnings relationship, with tests for publication bias

In this paper we provide an analytical review of previous estimates of the rate of return on schooling investments and measure how these estimates vary by country, over time, and by estimation method. We find evidence of reporting (or “file drawer”) bias in the estimates and, after due account is taken of this bias, we find that differences due to estimation method are much smaller than is sometimes reported, although some are statistically significant. We also find that estimated returns are higher in the US and they have increased in the last two decades.     

Stock returns following large 1-month declines and jumps: Evidence of overoptimism in the German market

We analyze the short-run and long-run performance of the largest 100 German firms that experience monthly stock price changes of more than ±20% between 1990 and 2003. The results indicate that the return patterns following large price increases are consistent with the overreaction hypothesis, but those following price declines indicate underreaction. Thus, our results support an overoptimism hypothesis for the German market. Further, for price decreases we find strong evidence of a size effect, while for price increases, market-to-book-ratios seem to play a role in determining the magnitude of the reaction. No evidence is found supporting the uncertain information hypothesis.     

The Returns to Education: Microeconomics

In this paper we focus on education as a private decision to invest in "human capital" and the estimation of the rate of return to that private investment. While the literature is replete with studies that estimate the rate of return using regression methods where the estimated return is obtained as the coefficient on a years of education variable in a log wage equation that contains controls for work experience and other individual characteristics, the issue is surrounded with difficulties. We outline the theoretical arguments underpinning the empirical developments and show that the evidence on private returns to the individual is compelling. Despite some of these issues surrounding the estimation of the return to schooling, our evidence, based on estimates from a variety of datasets and specifications, is that there is an unambiguously positive effect on the earnings of an individual from participation in education. Moreover, the size of the effect seems large relative to the returns on other investments.     

Estimates of the return to schooling in Sweden from a large sample of twins

A large sample of twins was used to examine whether conventional estimates of the return to schooling in Sweden are biased because ability is omitted from the earnings–schooling relationship. Ignoring measurement error, the results indicate that omitting ability from the earnings–schooling relationship leads to estimates that are positively biased. However, reasonable estimates of the measurement-error-adjusted returns are both above and below the unadjusted estimates, showing that the results depend crucially on a parameter not known at this time. However, an estimate of the reliability ratio was obtained using two measures on educational attainment. With this estimate of the reliability ratio, the measurement-error-adjusted estimate of the return to schooling in the sample of identical twins indicates that there is at most a slight ability bias in the conventional estimates of the return to schooling. The fundamental assumption of this kind of study is that within-pair differences in educational attainment are randomly determined. This assumption was also tested, but no strong evidence to reject it was found.     

Doubly Robust Estimation of Causal Effects with Multivalued Treatments: An Application to the Returns to Schooling

This paper provides doubly robust estimators for treatment effect parameters which are defined in a multivalued treatment effect framework. We apply this method to the unique dataset of the 1970 British Cohort Study (BCS70) to estimate returns to various levels of schooling. The analysis is carried out for female and male samples separately to capture possible gender differences. Average returns are estimated for the entire population, as well as conditional on having a specific educational achievement. For males, relative to no qualification, we find an average return to O‐levels of 6.3%, to A‐levels of 7.9% and to higher education of 25.4%. The estimated average returns to O‐level and A‐level relative to no qualification are insignificant for females, whereas the return to higher education is 19.9%.Copyright © 2014 John Wiley & Sons, Ltd.     

Too few university graduates. Inclusiveness and effectiveness of the Italian higher education system

Despite the absence of formal entry barriers, Italy is lagging behind the majority of the developed countries in the share of young individuals with tertiary education. Exploiting the administrative data of a large public Italian institution, we analyze student academic careers across recent matriculation cohorts. We propose a flexible discrete-time competing risks estimation that allows overcoming some major limitations of conventional competing risks models. We find that student pathways vary tremendously across prior schooling profiles: for example, the within 4-year dropout probability ranges between 10% and 77%. We observe improvements over time in retention and time-to-degree, and by decomposing changes into components related to the composition of the enrolled population, the choice of the field of study and ‘individual behavior’ after enrolment, we find that the latter plays a major role. However, the improvement is limited in size and does not interest students from the vocational track. Since this progress is not accompanied by an increase in the share of students making the transition from high school to university, altogether our results call for great concern over the inclusiveness and effectiveness of the Italian university system.     

After, before and during: returns to education in Hungary (1986–1998)

How valuable are the skills acquired under socialism in a market economy? This paper throws light on this question using unique data covering the years before and during transition (1986–1998) for about 3 million Hungarian wage earners. We find that returns to a year of schooling increased by 75% from 6.4% in 1986 to 11.2% in 1998. We also find that the private sector rewards formal education more than the public and, in terms of gender, although in 1986 women had greater returns to schooling than men, by 1998 this difference had been eliminated.     

Does Education Matter for Economic Growth?

Empirical growth regressions typically include mean years of schooling as a proxy for human capital. However, empirical research often finds that the sign and significance of schooling depends on the sample of observations or the specification of the model. We use a non‐parametric local‐linear regression estimator and a non‐parametric variable relevance test to conduct a rigorous and systematic search for significance of mean years of schooling by examining five of the most comprehensive schooling databases. Contrary to a few recent articles that have identified significant nonlinearities between education and growth, our results suggest that mean years of schooling is not a statistically relevant variable in growth regressions. However, we do find evidence (within a cross‐sectional framework), that educational achievement, measured by mean test scores, may provide a more reliable measure of human capital than mean years of schooling.