Family background, education, and earnings: the limited value of “test-score transmission”

This paper investigates the relationship between the inter-generational transmission of educational achievement (“test-score transmission”) and the inter-generational transmission of higher earnings (“income transmission”). We use administrative data from Israel to track the evolution of education and earnings gaps between “second-generation” (SG) students, whose parents have some tertiary education, and “first-generation” (FG) students, whose parents have none. We find that SG students achieve much better results on the screening tests that regulate access to selective tertiary education than FG students with similar eighth-grade test scores. Consequently, they enjoy greater access to the most selective tertiary degree programs, crowding out FG students with higher eighth-grade achievement. Yet this advantage does not manifest itself in earnings differentials at age 29, similarly conditioned on eighth-grade achievement, which are not statistically significant, and we find no evidence that these patterns are driven by SG students choosing study fields with steeper earnings curves. We find evidence of two mechanisms that mediate the relationship between achievement gains and earnings: FG students compensate for fewer options in tertiary education by accumulating more labor market experience; and SG students are more likely to forgo higher earnings for non-pecuniary benefits in employment, particularly by choosing public-sector employment.