Zvi Griliches' Contribution to the Theory of Human Capital

The paper discusses Zvi Griliches' contribution to the estimation of the earning function. The topic was the central theme of Griliches' research agenda during the 70s. Griliches played a major role in the ability-schooling controversy of the time. He was instrumental in repelling the attack of the "revisionists" on the Theory of Human Capital, and the claim that the schooling effect in the earning function is merely an artifact of the true "ability" and "family background" effects. Griliches lacked at the time the proper data to prove unequivocally that the ability bias plays only a minor role in the estimation of the rate of return to schooling. He was, however, able to show that the seemingly foolproof evidence of his opponents suffers from serious biases due to the endogeneity and the measurement errors in the schooling variable. He pointed out that it is highly probable that the standard OLS estimator suffers from a downward bias, rather than upward bias. His estimate of this bias, about 10 percent, has become the acceptable wisdom till today.