Multidimensional skills and the returns to schooling: Evidence from an interactive fixed‐effects approach and a linked survey‐administrative data set

This paper presents new evidence on returns to schooling based on an interactive fixed‐effects framework that allows for multiple unobserved skills with potentially time‐varying prices as well as individual‐level heterogeneity in returns. This constitutes a substantive generalization of most existing approaches. Our empirical analysis employs a unique linked survey‐administrative panel data set on education and earnings. We find average marginal returns to schooling of about 2.8–4.4% relative to least squares/instrumental variable estimates between 7.7% and 12.7%. Omitted ability accounts for a larger fraction of the aggregate least squares bias compared to heterogeneity. We also find considerable heterogeneity in individual returns.