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The Timing of Earnings Sampling over the Life-Cycle and IV Identification of the Return to Schooling

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  • Belzil, Christian

    ()
    (Ecole Polytechnique, Paris)

  • Hansen, Jörgen

    ()
    (Concordia University)

Abstract

We show that within a life-cycle skill accumulation model, IV identification of the return to schooling parameter is either achieved at any point in the life-cycle where the level of skills accumulated beyond school completion for compliers is exactly equal to the post-schooling skill level of non-compliers (the Skill-Equality condition), or when the skill-ratio is equal to the relative population proportions of non-compliers over compliers (the Weighted-Skill-Ratio condition). As a consequence, it is generally impossible to tie IV identification to any specific phase of the life-cycle and there cannot exist a generally acceptable "optimal" age to sample earnings for IV estimation. The practical example developed in the paper shows precisely how an instrument may fulfill identification at a multiplicity of ages, and how different instruments may achieve identification with specific sampling designs and fail to do so with others. Within a life-cycle skill accumulation data generating process, identification of the return to schooling requires not only implicit assumptions about the underlying model, but also assumptions about the validity of the specific age sampling distribution implied by the data.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6724.

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Length: 44 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6724

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Keywords: returns to schooling; instrumental variable methods; dynamic discrete choice; dynamic programming;

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  1. Christian Belzil, 2006. "The Return to Schooling in Structural Dynamic Models: A Survey," Post-Print halshs-00142538, HAL.
  2. Christian Belzil & J�rgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
  3. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  4. Belzil, Christian & Hansen, Jorgen, 2007. "A structural analysis of the correlated random coefficient wage regression model," Journal of Econometrics, Elsevier, vol. 140(2), pages 827-848, October.
  5. James Heckman, 1997. "Instrumental Variables: A Study of Implicit Behavioral Assumptions Used in Making Program Evaluations," Journal of Human Resources, University of Wisconsin Press, vol. 32(3), pages 441-462.
  6. 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.
  7. Steven Haider & Gary Solon, 2006. "Life-Cycle Variation in the Association between Current and Lifetime Earnings," NBER Working Papers 11943, National Bureau of Economic Research, Inc.
  8. Edward Vytlacil, 2002. "Independence, Monotonicity, and Latent Index Models: An Equivalence Result," Econometrica, Econometric Society, vol. 70(1), pages 331-341, January.
  9. Keane, Michael P., 2010. "Structural vs. atheoretic approaches to econometrics," Journal of Econometrics, Elsevier, vol. 156(1), pages 3-20, May.
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