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Are OLS Estimates of the Return to Schooling Biased Downward? Another Look

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  • McKinley L. Blackburn
  • David Neumark

Abstract

We examine evidence on omitted-ability bias in estimates of the economic return to schooling, using proxies for unobserved ability. We consider measurement error in these ability proxies and the potential endogeneity of both experience and schooling, and examine wages at labor market entry and later. Including ability proxies reduces the estimate of the return to schooling, and instrumenting for these proxies reduces the estimated return still further. Instrumenting for schooling leads to considerably higher estimates of the return to schooling, although only for wages at labor market entry. This estimated return generally reverts to being near (although still above) the OLS estimate if we allow experience to be endogenous. In contrast, for observations at least a few years after labor market entry, the evidence indicates that OLS estimates of the return to schooling that ignore omitted ability are, if anything, biased upward rather than downward.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4259.

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Date of creation: Jan 1993
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Publication status: published as Review of Economics and Statistics, Vol. 77, no. 2 (1995): 217-230.
Handle: RePEc:nbr:nberwo:4259

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  1. Behrman, Jere R & Rosenzweig, Mark R & Taubman, Paul, 1994. "Endowments and the Allocation of Schooling in the Family and in the Marriage Market: The Twins Experiment," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1131-74, December.
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