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Increasing Returns to Education: Theory and Evidence

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Author Info

  • Alison Booth

    () (Economics Program, RSSS, ANU)

  • Melvyn Coles
  • Xiaodong Gong

    ()

Abstract

We model educational investment and labor supply in a competitive economy with home and market production. Heterogeneous workers are assumed to have different productivities both at home and in the workplace. We show that there are increasing returns to education at the labor market participation margin, and that these depend directly on the elasticity of labor supply with respect to wages. Thus the increasing returns to education problem will be most relevant for women or other types with large enough home productivity. We estimate a three equation recursive model of working hours, wages and years of schooling, and find empirical support for the main predictions of the model.

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File URL: http://cbe.anu.edu.au/research/papers/ceprdpapers/DP522.pdf
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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 522.

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Length: 44 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:auu:dpaper:522

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Keywords: returns to education; home production; labor supply;

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  1. Paul Gomme & Richard Rogerson & Peter Rupert & Randall Wright, 2004. "The business cycle and the life cycle," Working Paper 0404, Federal Reserve Bank of Cleveland.
  2. Booth, Alison L & Coles, Melvyn G, 2005. "Education, Matching and the Allocative Value of Romance," CEPR Discussion Papers 5099, C.E.P.R. Discussion Papers.
  3. Alison Booth & Hiau Joo Kee, 2005. "Birth Order Matters: The Effect of Family Size and Birth Order on Educational Attainment," CEPR Discussion Papers 506, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  4. Black, Sandra E. & Devereux, Paul J. & Salvanes, Kjell G., 2005. "The more the merrier? The effect of family size and birth order on children's education," Open Access publications from University College Dublin urn:hdl:10197/310, University College Dublin.
  5. Acemoglu, Daron, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 779-804, August.
  6. Gronau, Reuben, 1977. "Leisure, Home Production, and Work-The Theory of the Allocation of Time Revisited," Journal of Political Economy, University of Chicago Press, vol. 85(6), pages 1099-1123, December.
  7. Patricia F. Apps & Ray Rees, 1999. "Individual versus Joint Taxation in Models with Household Production," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 393-403, April.
  8. Rosen, Sherwin, 1983. "Specialization and Human Capital," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 43-49, January.
  9. Card, David, 1999. "The causal effect of education on earnings," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 30, pages 1801-1863 Elsevier.
  10. Susumu Imai & Michael P. Keane, 2004. "Intertemporal Labor Supply and Human Capital Accumulation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 601-641, 05.
  11. Booth, Alison L & Coles, Melvyn G, 2007. "The Impact of Fiscal Policy on Labour Supply and Education in an Economy with Household and Market Production," CEPR Discussion Papers 6265, C.E.P.R. Discussion Papers.
  12. Rios-Rull, Jose-Victor, 1993. "Working in the Market, Working at Home, and the Acquisition of Skills: A General-Equilibrium Approach," American Economic Review, American Economic Association, vol. 83(4), pages 893-907, September.
  13. John Pencavel, 2002. "A Cohort Analysis of the Association between Work Hours and Wages among Men," Journal of Human Resources, University of Wisconsin Press, vol. 37(2), pages 251-274.
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