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Unobserved Ability and the Return to Schooling

  • Christian Belzil

    ()

    (Concordia University, W., Montreal, Canada, CIRANO, CIREQ, and IZA)

  • J�rgen Hansen

    ()

    (Concordia University, W., Montreal, Canada, CEPR, CIRANO, CIREQ, and IZA)

We estimate a structural dynamic programming model of schooling decisions with unobserved heterogeneity in school ability and market ability on a sample taken from the National Longitudinal Survey of Youth (NLSY). Both the instantaneous utility of attending school and the wage regression function are estimated flexibly. The null hypothesis that the local returns to schooling are constant is strongly rejected in favor of a convex wage regression function composed of 8 spline segments. The local returns are very low until grade 11 (1% per year or less), increase to 3.7% in grade 12 and exceed 10% only from grade 14 to grade 16. The average return increases smoothly from 0.4% (grade 7) to 4.6% (grade 16). The convexity of the log wage regression function implies that those who obtain more schooling also experience higher average returns. We strongly reject the null hypothesis that unobserved market ability is uncorrelated with realized schooling attainments, which underlies many previous studies that have used OLS to estimate the return to schooling. The correlation between realized schooling and market ability is found to be positive and is consistent with the existence of a positive "Ability Bias""." À partir d'un échantillon tiré du National Longitudinal Survey of Youth (NLSY), nous estimons un modèle de programmation dynamique des choix d'éducation en présence d'hétérogénéité non observée dans les capacités scolaires et aptitudes sur le marché de l'emploi. L'utilité instantanée de la fréquentation scolaire ainsi que la fonction de salaire sont évaluées de façon flexible. L'hypothèse nulle que les rendements marginaux de l'éducation sont constants est catégoriquement rejetée en faveur d'une fonction de salaire convexe composée de huit segments de fonction d'approximation spline. Les rendements marginaux s'avèrent être très faibles jusqu'à la onzième année (1 % ou moins par an), augmentent jusqu'à 3,7 % pour la douzième année et dépassent les 10 %

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 70 (2002)
Issue (Month): 5 (September)
Pages: 2075-2091

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Handle: RePEc:ecm:emetrp:v:70:y:2002:i:5:p:2075-2091
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  1. Belzil, Christian & Hansen, Jörgen, 2002. "Unobserved Ability and the Return to Schooling," IZA Discussion Papers 508, Institute for the Study of Labor (IZA).
  2. 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.
  3. Whitney K. Newey & James L. Powell & Francis Vella, 1998. "Nonparametric Estimation of Triangular Simultaneous Equations Models," Working papers 98-6, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Lang, Kevin, 1993. "Ability Bias, Discount Rate Bias and the Return to Education," MPRA Paper 24651, University Library of Munich, Germany.
  5. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  6. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
  7. Eckstein, Zvi & Wolpin, Kenneth, 1998. "Youth Employment and Academic Performance in High School," CEPR Discussion Papers 1861, C.E.P.R. Discussion Papers.
  8. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  9. Audrey Light & Wayne Strayer, 2000. "Determinants of College Completion: School Quality or Student Ability?," Journal of Human Resources, University of Wisconsin Press, vol. 35(2), pages 299-332.
  10. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  11. Charles F. Manski & John V. Pepper, 1998. "Monotone Instrumental Variables with an Application to the Returns to Schooling," NBER Technical Working Papers 0224, National Bureau of Economic Research, Inc.
  12. Kenneth I. Wolpin & Mark R. Rosenzweig, 2000. "Natural "Natural Experiments" in Economics," Journal of Economic Literature, American Economic Association, vol. 38(4), pages 827-874, December.
  13. James Heckman & Edward Vytlacil, 1998. "Instrumental Variables Methods for the Correlated Random Coefficient Model: Estimating the Average Rate of Return to Schooling When the Return is Correlated with Schooling," Journal of Human Resources, University of Wisconsin Press, vol. 33(4), pages 974-987.
  14. Belzil, Christian & Hansen, Jörgen, 2001. "Heterogeneous Returns to Human Capital and Dynamic Self-Selection," IZA Discussion Papers 272, Institute for the Study of Labor (IZA).
  15. Richard Blundell & James Powell, 2001. "Endogeneity in nonparametric and semiparametric regression models," CeMMAP working papers CWP09/01, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  16. Christian Belzil & Jörgen Hansen, 2001. "Estimating the Intergenerational Education Correlation from a Dynamic Programming Model," CIRANO Working Papers 2001s-20, CIRANO.
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