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Estimating returns to education using different natural experiment techniques

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  • Leigh, Andrew
  • Ryan, Chris

Abstract

How much do returns to education differ across different natural experiment methods? To test this, we estimate the rate of return to schooling in Australia using two different instruments for schooling: month of birth and changes in compulsory schooling laws. With annual pre-tax income as our measure of income, we find that the naïve ordinary least squares (OLS) returns to an additional year of schooling is 13%. The month of birth IV approach gives an 8% rate of return to schooling, while using changes in compulsory schooling laws as an IV produces a 12% rate of return. We then compare our results with a third natural experiment: studies of Australian twins that have been conducted by other researchers. While these studies have tended to estimate a lower return to education than ours, we believe that this is primarily due to the better measurement of income and schooling in our data set. Australian twins studies are consistent with our findings insofar as they find little evidence of ability bias in the OLS rate of return to schooling. Together, the estimates suggest that between one-tenth and two-fifths of the OLS return to schooling is due to ability bias. The rate of return to education in Australia, corrected for ability bias, is around 10%, which is similar to the rate in Britain, Canada, the Netherlands, Norway and the United States.

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Bibliographic Info

Article provided by Elsevier in its journal Economics of Education Review.

Volume (Year): 27 (2008)
Issue (Month): 2 (April)
Pages: 149-160

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Handle: RePEc:eee:ecoedu:v:27:y:2008:i:2:p:149-160

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Web page: http://www.elsevier.com/locate/econedurev

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Cited by:
  1. Muhamad Purnagunawan, 2008. "Earning Motivation and The Conventional Earning Function," Working Papers in Economics and Development Studies (WoPEDS) 200805, Department of Economics, Padjadjaran University, revised Sep 2008.
  2. Warn N. Lekfuangfu & Nattavudh Powdthavee & Mark Wooden, 2013. "The marginal income effect of education on happiness: estimating the direct and indirect effects of compulsory schooling on well-being in Australia," LSE Research Online Documents on Economics 51552, London School of Economics and Political Science, LSE Library.
  3. repec:iae:iaewps:wp2014n01 is not listed on IDEAS
  4. Kasey Buckles & Daniel M. Hungerman, 2008. "Season of Birth and Later Outcomes: Old Questions, New Answers," NBER Working Papers 14573, National Bureau of Economic Research, Inc.
  5. Rosemary Walker & Liviu Florea, 2014. "Easy-Come-Easy-Go: Moral Hazard in the Context of Return to Education," Journal of Business Ethics, Springer, vol. 120(2), pages 201-217, March.
  6. Chuang, Yih-chyi & Lai, Wei-wen, 2010. "Heterogeneity, comparative advantage, and return to education: The case of Taiwan," Economics of Education Review, Elsevier, vol. 29(5), pages 804-812, October.
  7. Andrew Leigh, 2007. "Returns to Education in Australia," CEPR Discussion Papers 561, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  8. Klein, Roger & Vella, Francis, 2006. "Estimating the Return to Endogenous Schooling Decisions for Australian Workers via Conditional Second Moments," IZA Discussion Papers 2407, Institute for the Study of Labor (IZA).
  9. Hafizur Rahman & Jim Seldon & Zéna Seldon, 2012. "The Opportunity Cost of Education: Where Do the Lost Years Go?," Journal for Economic Educators, Middle Tennessee State University, Business and Economic Research Center, vol. 12(1), pages 43-52, Fall.
  10. Carvalho, Jean-Paul & Koyama, Mark, 2013. "Resisting Education," MPRA Paper 48048, University Library of Munich, Germany.
  11. Martine Mariotti & Juergen Meinecke, 2011. "Bounds on the Return to Education in Australia using Ability Bias," ANU Working Papers in Economics and Econometrics 2011-551, Australian National University, College of Business and Economics, School of Economics.
  12. Arabsheibani, Reza & Staneva, Anita V., 2012. "Returns to Education in Russia: Where There Is Risky Sexual Behaviour There Is Also an Instrument," IZA Discussion Papers 6726, Institute for the Study of Labor (IZA).

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