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Proxying Ability by Family Background in Returns to Schooling Estimations is Generally a Bad Idea

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  • Erik Mellander
  • Sofia Sandgren‐Massih

Abstract

When schooling is measured with error and data on ability are lacking, return to schooling estimates will be subject to positive omitted variable bias (OVB) and negative measurement error bias (MEB). We investigate how these biases are affected when ability is proxied by family background variables. We show that the effect on OVB is uncertain, while MEB invariably increases in magnitude. Our empirical analysis demonstrates that MEB generally dominates OVB. With more background variables or increased measurement error, the total bias rapidly becomes negative and increasing in magnitude, thereby driving the return estimate further and further away from the true value.

Suggested Citation

  • Erik Mellander & Sofia Sandgren‐Massih, 2008. "Proxying Ability by Family Background in Returns to Schooling Estimations is Generally a Bad Idea," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(4), pages 853-875, December.
    • Handle: RePEc:bla:scandj:v:110:y:2008:i:4:p:853-875
    DOI: 10.1111/j.1467-9442.2008.00564.x
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    References listed on IDEAS

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    1. Lam, David & Schoeni, Robert F, 1993. "Effects of Family Background on Earnings and Returns to Schooling: Evidence from Brazil," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 710-740, August.
    2. Hansen, Karsten T. & Heckman, James J. & Mullen, K.J.Kathleen J., 2004. "The effect of schooling and ability on achievement test scores," Journal of Econometrics, Elsevier, vol. 121(1-2), pages 39-98.
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    6. Frost, Peter A, 1979. "Proxy Variables and Specification Bias," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 323-325, May.
    7. Mellander, Erik & Sandgren-Massih, Sofia, 2008. "Proxying ability by family background in returns to schooling estimations is generally a bad idea," Working Paper Series 2008:22, IFAU - Institute for Evaluation of Labour Market and Education Policy.
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    Cited by:

    1. Mellander, Erik, 2014. "Transparency of human resource policy," Working Paper Series 2014:24, IFAU - Institute for Evaluation of Labour Market and Education Policy.

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