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On Omitted Variable Bias and Measurement Error in Returns to Schooling Estimates

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  • Mellander, Erik

    ()
    (The Research Institute of Industrial Economics)

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    Abstract

    Lam and Schoeni (1993) consider an equation where earnings are explained by schooling and ability. They assume that ability data are lacking and that schooling is measured with error. The estimate obtained by regressing earnings on schooling thus contains omitted variable bias (OVB), which is positive, and measurement error bias (MEB), which is negative. Adding a family background variable to proxy for ability is claimed to: i) decrease the OVB towards, but not below, zero and ii) make the MEB even more negative. This note claims that while ii) is true, even in the context of multiple family background variables, i) is in general incorrect. The OVB may increase in magnitude and/or change sign. Conditions are provided under which i) holds. A simulation procedure is suggested that will yield consistent estimates of the total bias and its components, conditional upon values on the true return and the measurement error variance.

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    Bibliographic Info

    Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 494.

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    Length: 19 pages
    Date of creation: 05 Mar 1998
    Date of revision:
    Handle: RePEc:hhs:iuiwop:0494

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    Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
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    Related research

    Keywords: Missing data; Proxy variables; Measurement error; Partial correlations; Simulations;

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    References

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    1. Lam. D. & Schoeni, R.F., 1996. "Effects on Family Background on Earnings and Returns to Schooling: Evidence from Brazil," Papers 96-13, RAND - Reprint Series.
    2. Welch, Finis, 1975. "Human Capital Theory: Education, Discrimination, and Life Cycles," American Economic Review, American Economic Association, vol. 65(2), pages 63-73, May.
    3. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
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