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Bounds on the Return to Education in Australia using Ability Bias

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  • Martine Mariotti

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  • Juergen Meinecke

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Abstract

We estimate the average return to education and the ability bias applying a parametric model of intra-household correlation suggested by Card (1999, 2001) to the Household, Income and Labour Dynamics in Australia survey. Using the subsample of dual-earner households, we obtain an average return to education of 5.5% and an ability bias of 19%. Our paper is also the first to provide informative inference results on ability bias. We extrapolate the ability bias estimate from dual-earner households to the whole sample. Using Manski's (1989) nonparametric no assumptions bounds to partially identify the ability bias for the whole sample, we find that ability bias lies between 9% and 63%. This implies an average return to education of between 3.0% and 7.4% for the whole sample. Our estimates are conservative and compare well to other estimates of the average return to education which typically lie to the right of that interval.

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Bibliographic Info

Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2011-551.

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Length: 23 Pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:acb:cbeeco:2011-551

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  1. Joshua D. Angrist & Alan B. Krueger, 1990. "Does Compulsory School Attendance Affect Schooling and Earnings?," NBER Working Papers 3572, National Bureau of Economic Research, Inc.
  2. Ashenfelter, Orley & Krueger, Alan B, 1994. "Estimates of the Economic Returns to Schooling from a New Sample of Twins," American Economic Review, American Economic Association, vol. 84(5), pages 1157-73, December.
  3. Orley Ashenfelter & Cecilia Rouse, 1997. "Income, Schooling, and Ability: Evidence from a New Sample of Identical Twins," NBER Working Papers 6106, National Bureau of Economic Research, Inc.
  4. Leigh, Andrew & Ryan, Chris, 2008. "Estimating returns to education using different natural experiment techniques," Economics of Education Review, Elsevier, vol. 27(2), pages 149-160, April.
  5. Miller, Paul & Mulvey, Charles & Martin, Nick, 2006. "The return to schooling: Estimates from a sample of young Australian twins," Labour Economics, Elsevier, vol. 13(5), pages 571-587, October.
  6. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
  7. Charles F. Manski, 1989. "Anatomy of the Selection Problem," Journal of Human Resources, University of Wisconsin Press, vol. 24(3), pages 343-360.
  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. Thomas Hertz, 2003. "Upward Bias in the Estimated Returns to Education: Evidence from South Africa," American Economic Review, American Economic Association, vol. 93(4), pages 1354-1368, September.
  10. Miller, Paul W & Mulvey, Charles & Martin, Nick, 1995. "What Do Twins Studies Reveal about the Economic Returns to Education? A Comparison of Australian and U.S. Findings," American Economic Review, American Economic Association, vol. 85(3), pages 586-99, June.
  11. Miller, Paul & Mulvey, Charles & Martin, Nick, 1997. "Family Characteristics and the Returns to Schooling: Evidence on Gender Differences from a Sample of Australian Twins," Economica, London School of Economics and Political Science, vol. 64(253), pages 119-36, February.
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