Working Paper: NBER ID: w20250
Authors: Manudeep Bhuller; Magne Mogstad; Kjell G. Salvanes
Abstract: What do the education premiums look like over the life cycle? What is the impact of schooling on lifetime earnings? How does the internal rate of return compare with opportunity cost of funds? To what extent do progressive taxes attenuate the incentives to invest in education? This paper exploits Norwegian population panel data with nearly career long earnings histories to answer these important questions. We provide a detailed picture of the causal relationship between schooling and earnings over the life cycle, following individuals over their working lifespan. To account for endogeneity of schooling, we apply three commonly used identification strategies. Our estimates show that additional schooling gives higher lifetime earnings and steeper age-earnings profile, in line with predictions from human capital theory. These estimates imply an internal rate of return of around 10 percent, after taking into account income taxes and earnings-related pension entitlements. Under standard conditions, this finding suggests it was financially profitable to take additional schooling because the rates of return were substantially higher than the market interest rates. By comparison, Mincer regressions understate substantially the rates of return. We explore the reasons for this downward bias, finding that it is driven by Mincer's assumptions of no earnings while in school and exogenous post-schooling employment.
Keywords: No keywords provided
JEL Codes: J24; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| twin-pair differences in schooling (I24) | earnings differences (J31) |
| additional schooling (I23) | higher lifetime earnings (J17) |
| additional schooling (I23) | steeper age-earnings profile (J26) |
| education (I29) | earnings (J31) |
| education (I29) | internal rate of return on education (I26) |
| ability test scores (C12) | earnings (J31) |