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Life-cycle bias and the returns to schooling in current and lifetime earnings

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  • Manudeep Bhuller
  • Magne Mogstad
  • Kjell G.Salvanes

    ()
    (Statistics Norway)

Abstract

This paper uses a unique data set with nearly career-long earnings histories to provide evidence on the returns to schooling in current and lifetime earnings. We use these results to assess the importance of life-cycle bias in earnings regressions using current earnings as a proxy for lifetime earnings. To account for the endogeneity of schooling, we apply three commonly used identification strategies. Our estimates demonstrate a strong life-cycle bias, often exceeding the bias from assuming that schooling is exogenous. We further explore the problems caused by life-cycle bias in research on the economic returns to schooling, and discuss possible remedies.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 666.

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Date of creation: Oct 2011
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Handle: RePEc:ssb:dispap:666

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Keywords: Returns to schooling; life-cycle bias; lifetime earnings; current earnings; errors-in-variables model;

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References

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  1. Gunnar Isacsson, 2004. "Estimating the economic return to educational levels using data on twins," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 99-119.
  2. Jan Brenner, 2009. "Life-Cycle Variations in the Association between Current and Lifetime Earnings – Evidence for German Natives and Guest Workers," Ruhr Economic Papers 0095, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
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  8. Jan Leonard Stuhler, 2010. "Empirical Strategies to Eliminate Life-Cycle Bias in the Intergenerational Elasticity of Earnings Literature," SOEPpapers on Multidisciplinary Panel Data Research 346, DIW Berlin, The German Socio-Economic Panel (SOEP).
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Citations

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Cited by:
  1. Nybom, Martin, 2014. "The Distribution of Lifetime Earnings Returns to College," Working Paper Series 2/2014, Swedish Institute for Social Research.
  2. Bönke, Timm & Corneo, Giacomo & Lüthen, Holger, 2011. "Lifetime Earnings Inequality in Germany," IZA Discussion Papers 6020, Institute for the Study of Labor (IZA).
  3. Bharadwaj, Prashant & Johnsen, Julian V. & Loken, Katrine Vellesen, 2012. "Smoking Bans, Maternal Smoking and Birth Outcomes," IZA Discussion Papers 7006, Institute for the Study of Labor (IZA).
  4. G. Brunello & M. Fort & G. Weber & C. T. Weiss, 2013. "Testing the Internal Validity of Compulsory School Reforms as Instrument for Years of Schooling," Working Papers wp911, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Brunello, Giorgio & Weber, Guglielmo & Weiss, Christoph T., 2012. "Books Are Forever: Early Life Conditions, Education and Lifetime Income," IZA Discussion Papers 6386, Institute for the Study of Labor (IZA).
  6. Koerselman, Kristian & Uusitalo, Roope, 2013. "The Risk and Return of Human Capital Investments," IZA Discussion Papers 7752, Institute for the Study of Labor (IZA).
  7. Haaland, Venke Furre, 2013. "The Lost Generation: Effects of Youth Labor Market Opportunities on Long-Term Labor Market Outcomes," UiS Working Papers in Economics and Finance 2013/8, University of Stavanger.
  8. Giorgio Brunello & Guglielmo Weber & Christoph Weiss, 2012. "Books are forever: Early life conditions, education and lifetime earnings in Europe," ISER Discussion Paper 0842, Institute of Social and Economic Research, Osaka University.
  9. Rolf Aaberge & Magne Mogstad, 2012. "Inequality in current and lifetime income," Discussion Papers 726, Research Department of Statistics Norway.
  10. Nybom, Martin & Stuhler, Jan, 2011. "Heterogeneous Income Profiles and Life-Cycle Bias in Intergenerational Mobility Estimation," IZA Discussion Papers 5697, Institute for the Study of Labor (IZA).

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