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Estimating Returns to Education: Three Natural Experiment Techniques Compared

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  • Andrew Leigh
  • Chris Ryan

Abstract

We compare three quasi-experimental approaches to estimating the returns to schooling in Australia: instrumenting schooling using month of birth, instrumenting schooling using changes in compulsory schooling laws, and comparing outcomes for twins. With annual pre-tax income as our measure of income, we find that the naïve (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. Finally, we review estimates from twins studies. While we estimate a higher return to education than previous studies, we believe that this is primarily due to the better measurement of income and schooling in our dataset. 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. Our estimates of the ability bias in OLS estimates of the rate of return to schooling range from 9% to 39%. Overall, our findings suggest the Australian rate of return to education, 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

Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 493.

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Length: 27 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:auu:dpaper:493

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Keywords: returns to education; instrumental variables; compulsory schooling; twins; Australia;

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References

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Citations

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Cited by:
  1. 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.
  2. Andrew Leigh, 2008. "Returns To Education In Australia," Economic Papers, The Economic Society of Australia, vol. 27(3), pages 233-249, 09.
  3. repec:iae:iaewps:wp2014n01 is not listed on IDEAS
  4. Kasey S. Buckles & Daniel M. Hungerman, 2013. "Season of Birth and Later Outcomes: Old Questions, New Answers," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 711-724, July.
  5. 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).
  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. 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.
  8. 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.
  9. 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.
  10. 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.
  11. Carvalho, Jean-Paul & Koyama, Mark, 2013. "Resisting Education," MPRA Paper 48048, University Library of Munich, Germany.
  12. 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).

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