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Proxying ability by family background in returns to schooling estimations is generally a bad idea

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Author Info
Mellander, Erik () (IFAU - Institute for Labour Market Policy Evaluation)
Sandgren-Massih, Sofia () (Department of Economonics, Uppsala University)
Abstract

A regression model is considered where earnings are explained by schooling and ability. It is assumed that schooling is measured with error and that there are no data on ability. Regressing earnings on observed schooling then yields an estimate of the return to schooling that is subject to positive omitted variable bias (OVB) and negative measurement error bias (MEB). The effects on the OVB and the MEB from using family background variables as proxies for ability are investigated theoretically and empirically. The theoretical analysis demonstrates that the impact on the OVB is uncertain, while the MEB invariably increases in magnitude. The empirical analysis shows that the MEB generally dominates the OVB. As the measurement error increases and/or more family background variables are added, the total bias rapidly becomes negative, driving the estimated return further and further away from the true value.

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Publisher Info
Paper provided by IFAU - Institute for Labour Market Policy Evaluation in its series Working Paper Series with number 2008:22.

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Length: 28 pages
Date of creation: 20 Oct 2008
Date of revision:
Publication status: Published in Scandinavian Journal of Economics, 2008, pages 853-875.
Handle: RePEc:hhs:ifauwp:2008_022

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Postal: Labour Market Policy Evaluation, P O Box 513, SE-751 20 Uppsala, Sweden
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Related research
Keywords: Missing data; proxy variables; measurement error; consistent estimates of omitted variable bias and measurement error bias;

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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This page was last updated on 2009-12-3.

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