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The Causal Effect of Education on Wages Revisited

  • Matt Dickson

This paper estimates the return to education using two alternative instrumental variable estimators: one exploits variation in schooling associated with early smoking behaviour, the other uses the raising of the minimum school leaving age. Each instrument estimates a 'local average treatment effect' and my motivation is to analyse the extent to which these differ and which is more appropriate for drawing conclusions about the return to education in Britain. I implement each instrument on the same data from the British Household Panel Survey, and use the over-identification to test the validity of my instruments. I find that the instrument constructed using early smoking behaviour is valid as well as being strong, and argue that it provides a better estimate of the average effect of additional education, akin to ordinary least squares but corrected for endogeneity. I also exploit the dual sources of exogenous variation in schooling to derive a further IV estimate of the return to schooling. I find the OLS estimate to be considerably downward biased (around 4.6%) compared with the IV estimates of 12.9% (early smoking), 10.2% (RoSLA) and 12.5% (both instruments).

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 75 (2013)
Issue (Month): 4 (08)
Pages: 477-498

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Handle: RePEc:bla:obuest:v:75:y:2013:i:4:p:477-498
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  1. Grossman, Michael, 2006. "Education and Nonmarket Outcomes," Handbook of the Economics of Education, Elsevier.
  2. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/GMM estimation and testing," Boston College Working Papers in Economics 667, Boston College Department of Economics, revised 05 Sep 2007.
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  7. Lang, Kevin, 1993. "Ability Bias, Discount Rate Bias and the Return to Education," MPRA Paper 24651, University Library of Munich, Germany.
  8. John Bound & David A. Jaeger & Regina Baker, 1993. "The Cure Can Be Worse than the Disease: A Cautionary Tale Regarding Instrumental Variables," NBER Technical Working Papers 0137, National Bureau of Economic Research, Inc.
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  13. David Card, 1994. "Earnings, Schooling, and Ability Revisited," Working Papers 710, Princeton University, Department of Economics, Industrial Relations Section..
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  15. Colm Harmon; & Ian Walker, 1995. "Estimates of Economic Return to Schooling in the UK," Economics, Finance and Accounting Department Working Paper Series n540195, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  16. Harmon, Colm & Walker, Ian, 1995. "Estimates of the Economic Return to Schooling for the United Kingdom," American Economic Review, American Economic Association, vol. 85(5), pages 1278-86, December.
  17. Harmon, Colm & Walker, Ian, 1999. "The marginal and average returns to schooling in the UK," European Economic Review, Elsevier, vol. 43(4-6), pages 879-887, April.
  18. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, September.
  19. Chevalier, Arnaud & Harmon, Colm & Walker, Ian & Zhu, Yu, 2003. "Does Education Raise Productivity or Just Reflect It?," CEPR Discussion Papers 3993, C.E.P.R. Discussion Papers.
  20. Lalith Munasinghe & Nachum Sicherman, 2000. "Why Do Dancers Smoke? Time Preference, Occupational Choice, and Wage Growth," NBER Working Papers 7542, National Bureau of Economic Research, Inc.
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  27. Uusitalo, Roope, 1999. "Return to education in Finland," Labour Economics, Elsevier, vol. 6(4), pages 569-580, November.
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  29. William N. Evans & Edward Montgomery, 1994. "Education and Health: Where There's Smoke There's an Instrument," NBER Working Papers 4949, National Bureau of Economic Research, Inc.
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  31. Lorraine Dearden & Emla Fitzsimons & Gill Wyness, 2011. "The Impact of Tuition Fees and Support on University Participation in the UK," CEE Discussion Papers 0126, Centre for the Economics of Education, LSE.
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  33. Michael P. Murray, 2006. "Avoiding Invalid Instruments and Coping with Weak Instruments," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 111-132, Fall.
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