Working Paper: NBER ID: w12664
Authors: Eric A. Hanushek; Lei Zhang
Abstract: Returns to education are traditionally estimated in a Mincer wage equation from the variation in schooling for a cross-section of individuals of different ages. Because individuals receive education at different time periods, when the quality of their education may not be identical, this method leads to an over- or under-estimation of the return to education of a given quality depending on how education quality evolves over time. This quality issue interacts with ability bias from self-selection into schooling and is particularly problematic when comparing returns across different countries. Using microdata from the International Adult Literacy Survey, we construct quality adjusted measures of schooling attained at different time periods and use these along with international literacy test information to estimate returns to skills for 13 countries. Estimated returns to quality-adjusted education are considerably higher than the traditional estimate for most countries, but these are offset to varying degrees by selection biases on ability. The combined corrections alter significantly the pattern of returns to schooling and skill seen from naive Mincer wage equations.
Keywords: Returns to Education; Quality of Education; Cognitive Skills; International Comparisons; Labor Market Outcomes
JEL Codes: I21; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher quality schooling (I24) | greater cognitive skill development (I25) |
| greater cognitive skill development (I25) | affects labor market returns (J49) |
| cognitive skills (G53) | positive effect on earnings (M52) |
| quality-adjusted education (I26) | alters perceived pattern of returns to education (I26) |
| quality-adjusted measures of schooling (J24) | higher estimates of returns to education (I26) |
| an additional year of quality-adjusted schooling (I21) | higher return in terms of earnings (G12) |