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A Structural Analysis of the Correlated Random Coefficient Wage Regression Model

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Author Info
Belzil, Christian () (Concordia University, CIREQ, CIRANO, and IZA Bonn)
Hansen, Jörgen (Concordia University, CIREQ, CIRANO, and IZA Bonn)

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Abstract

We estimate a finite mixture dynamic programming model of schooling decisions in which the log wage regression function is set in a random coefficient framework. The model allows for absolute and comparative advantages in the labor market and assumes that the population is composed of 8 unknown types. Overall, labor market skills (as opposed to taste for schooling) appear to be the prime factor explaining schooling attainments. The estimates indicate a higher cross-sectional variance in the returns to experience than in the returns to schooling. From various simulations, we find that the sub-population mostly affected by a counterfactual change in the utility of attending school is composed of individuals who have any combination of some of the following attributes: absolute advantages in the labor market, high returns to experience, low utility of attending school and relatively low returns to schooling. Unlike what is often postulated in the average treatment effect literature, the weak correlation (unconditional) between the returns to schooling and the individual reactions to treatment is not sufficient to reconcile the discrepancy between OLS and IV estimates of the returns to schooling often found in the literature.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 512.

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Length: 35 pages
Date of creation: Jun 2002
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Handle: RePEc:iza:izadps:dp512

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Related research
Keywords: random coefficient; returns to schooling; comparative advantages; dynamic programming; dynamic self-selection;

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Find related papers by JEL classification:
J2 - Labor and Demographic Economics - - Demand and Supply of Labor
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  3. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 262-333, April. [Downloadable!] (restricted)
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  6. Wooldridge, Jeffrey M., 1997. "On two stage least squares estimation of the average treatment effect in a random coefficient model," Economics Letters, Elsevier, vol. 56(2), pages 129-133, October. [Downloadable!] (restricted)
  7. Belzil, Christian & Hansen, Jörgen, 2002. "Unobserved Ability and the Return to Schooling," IZA Discussion Papers 508, Institute for the Study of Labor (IZA). [Downloadable!]
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  8. Belzil, Christian & Hansen, Jörgen, 2003. "Structural Estimates of the Intergenerational Education Correlation," IZA Discussion Papers 973, Institute for the Study of Labor (IZA). [Downloadable!]
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  13. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-75, March. [Downloadable!] (restricted)
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  14. Costas Megir & Martin Palme, 2001. "The effect of a social experiment in education," CEE Discussion Papers 0014, Centre for the Economics of Education, LSE. [Downloadable!]
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  17. Jean-Pierre Florens & James Heckman & Costas Meghir & Edward Vytlacil, 2002. "Instrumental variables, local instrumental variables and control functions," CeMMAP working papers CWP15/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Belzil, 2006. "The Return to Schooling in Structural Dynamic Models: A Survey," IZA Discussion Papers 2370, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Belzil, Christian & Hansen, Jörgen, 2008. "Calibration and IV Estimation of a Wage Outcome Equation in a Dynamic Environment," IZA Discussion Papers 3528, Institute for the Study of Labor (IZA). [Downloadable!]
  3. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2005. "Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond," IZA Discussion Papers 1700, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Christian Belzil & Jörgen Hansen, 2004. "Earnings Dispersion, Risk Aversion and Education," Post-Print halshs-00180125_v1, HAL. [Downloadable!]
    Other versions:
  5. Belzil, Christian & Hansen, Jörgen & Kristensen, Nicolai, 2008. "Estimating Complementarity between Education and Training," IZA Discussion Papers 3882, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  6. Christian Belzil, 2007. "Subjective Beliefs and Schooling Decisions," IZA Discussion Papers 2820, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  7. Martin Kahanec, 2007. "Ethnic Specialization and Earnings Inequality: Why Being a Minority Hurts but Being a Big Minority Hurts More," IZA Discussion Papers 2650, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Belzil, Christian & Hansen, Jörgen, 2002. "Unobserved Ability and the Return to Schooling," IZA Discussion Papers 508, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  9. Nielsen, Chantal Pohl, 2007. "Immigrant overeducation : evidence from Denmark," Policy Research Working Paper Series 4234, The World Bank. [Downloadable!]
  10. Christian Belzil & Jörgen Hansen, 2005. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model with an Application to the OLS-IV Puzzle," IZA Discussion Papers 1585, Institute for the Study of Labor (IZA). [Downloadable!]
  11. John K. Dagsvik, Torbjørn Hægeland and Arvid Raknerud, 2008. "Estimating the Returns to Schooling: A Likelihood Approach Based on Normal Mixtures," Discussion Papers 567, Research Department of Statistics Norway. [Downloadable!]
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