Working Paper: NBER ID: w7235
Authors: Thomas J. Kane; Cecilia Elena Rouse; Douglas Staiger
Abstract: We propose a general method of moments technique to identify measurement error in self-reported and transcript-reported schooling using differences in wages, test scores, and other covariates to discern the relative verity of each measure. We also explore the implications of such reporting errors for both OLS and IV estimates of the returns to schooling. The results cast a new light on two common findings in the extensive literature on the returns to schooling: sheepskin effects' and the recent IV estimates, relying on natural experiments' to identify the payoff to schooling. First, respondents tend to self-report degree attainment much more accurately than they report educational attainment not corresponding with degree attainment. For instance, we estimate that more than 90 percent of those with associate's or bachelor's degrees accurately report degree attainment, while only slightly over half of those with 1 or 2 years of college credits accurately report their educational attainment. As a result, OLS estimates tend to understate returns per year of schooling and overstate degree effects. Second, because the measurement error in educational attainment is non-classical, IV estimates also tend to be biased, although the magnitude of the bias depends upon the nature of the measurement error in the region of educational attainment affected by the instrument.
Keywords: Returns to Education; Measurement Error; General Method of Moments
JEL Codes: C1; I2; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quarter of birth as an instrument (C36) | Overstatement of returns to education (I26) |
| College transcript years as an instrument (I21) | Understatement of returns to education (I26) |
| Measurement error in self-reported schooling (I21) | OLS estimates of returns to schooling (I26) |
| Inaccurate reporting of years of schooling (I21) | OLS estimates understating returns per year of schooling (J24) |
| Degree attainment reporting accuracy (I23) | OLS estimates of degree attainment effects (I24) |
| Nonclassical measurement error (C20) | IV estimates bias (C26) |