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Bounds on the Return to Education in Australia using Ability Bias

  • Martine Mariotti

    ()

  • Juergen Meinecke

    ()

We estimate the average return to education and the ability bias applying a parametric model of intra-household correlation suggested by Card (1999, 2001) to the Household, Income and Labour Dynamics in Australia survey. Using the subsample of dual-earner households, we obtain an average return to education of 5.5% and an ability bias of 19%. Our paper is also the first to provide informative inference results on ability bias. We extrapolate the ability bias estimate from dual-earner households to the whole sample. Using Manski's (1989) nonparametric no assumptions bounds to partially identify the ability bias for the whole sample, we find that ability bias lies between 9% and 63%. This implies an average return to education of between 3.0% and 7.4% for the whole sample. Our estimates are conservative and compare well to other estimates of the average return to education which typically lie to the right of that interval.

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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2011-551.

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Length: 23 Pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:acb:cbeeco:2011-551
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  1. Joshua D. Angrist & Alan B. Krueger, 1990. "Does Compulsory School Attendance Affect Schooling and Earnings?," NBER Working Papers 3572, National Bureau of Economic Research, Inc.
  2. Leigh, Andrew & Ryan, Chris, 2008. "Estimating returns to education using different natural experiment techniques," Economics of Education Review, Elsevier, vol. 27(2), pages 149-160, April.
  3. Miller, Paul & Mulvey, Charles & Martin, Nick, 1997. "Family Characteristics and the Returns to Schooling: Evidence on Gender Differences from a Sample of Australian Twins," Economica, London School of Economics and Political Science, vol. 64(253), pages 119-36, February.
  4. Miller, Paul & Mulvey, Charles & Martin, Nick, 2006. "The return to schooling: Estimates from a sample of young Australian twins," Labour Economics, Elsevier, vol. 13(5), pages 571-587, October.
  5. Charles F. Manski, 1989. "Anatomy of the Selection Problem," Journal of Human Resources, University of Wisconsin Press, vol. 24(3), pages 343-360.
  6. David Card, 2000. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," NBER Working Papers 7769, National Bureau of Economic Research, Inc.
  7. Thomas Hertz, 2003. "Upward Bias in the Estimated Returns to Education: Evidence from South Africa," American Economic Review, American Economic Association, vol. 93(4), pages 1354-1368, September.
  8. Ashenfelter, Orley & Krueger, Alan B, 1994. "Estimates of the Economic Returns to Schooling from a New Sample of Twins," American Economic Review, American Economic Association, vol. 84(5), pages 1157-73, December.
  9. Orley Ashenfelter & Cecilia Rouse, 1997. "Income, Schooling, and Ability: Evidence from a New Sample of Identical Twins," NBER Working Papers 6106, National Bureau of Economic Research, Inc.
  10. Miller, Paul W & Mulvey, Charles & Martin, Nick, 1995. "What Do Twins Studies Reveal about the Economic Returns to Education? A Comparison of Australian and U.S. Findings," American Economic Review, American Economic Association, vol. 85(3), pages 586-99, June.
  11. Klein, Roger & Vella, Francis, 2006. "Estimating the Return to Endogenous Schooling Decisions for Australian Workers via Conditional Second Moments," IZA Discussion Papers 2407, Institute for the Study of Labor (IZA).
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