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Estimating Returns to Education: Three Natural Experiment Techniques Compared

We compare three quasi-experimental approaches to estimating the returns to schooling in Australia: instrumenting schooling using month of birth, instrumenting schooling using changes in compulsory schooling laws, and comparing outcomes for twins. With annual pre-tax income as our measure of income, we find that the naïve (OLS) returns to an additional year of schooling is 13%. The month of birth IV approach gives an 8% rate of return to schooling, while using changes in compulsory schooling laws as an IV produces a 12% rate of return. Finally, we review estimates from twins studies. While we estimate a higher return to education than previous studies, we believe that this is primarily due to the better measurement of income and schooling in our dataset. Australian twins studies are consistent with our findings insofar as they find little evidence of ability bias in the OLS rate of return to schooling. Our estimates of the ability bias in OLS estimates of the rate of return to schooling range from 9% to 39%. Overall, our findings suggest the Australian rate of return to education, corrected for ability bias, is around 10%, which is similar to the rate in Britain, Canada, the Netherlands, Norway and the United States.

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Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 493.

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Length: 27 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:auu:dpaper:493
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  3. Rummery, Sarah & Vella, Francis & Verbeek, Marno, 1999. "Estimating the returns to education for Australian youth via rank-order instrumental variables," Labour Economics, Elsevier, vol. 6(4), pages 491-507, November.
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  7. Aakvik, Arild & Salvanes, Kjell G. & Vaage, Kjell, 2003. "Measuring Heterogeneity in the Returns to Education in Norway Using Educational Reforms," Working Papers in Economics 08/03, University of Bergen, Department of Economics.
  8. Preston, Alison, 1997. "Where Are We Now with Human Capital Theory in Australia?," The Economic Record, The Economic Society of Australia, vol. 73(220), pages 51-78, March.
  9. Fertig, Michael & Kluve, Jochen, 2005. "The Effect of Age at School Entry on Educational Attainment in Germany," RWI Discussion Papers 27, Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI).
  10. Kevin Milligan & Enrico Moretti & Philip Oreopoulos, 2003. "Does Education Improve Citizenship? Evidence from the U.S. and the U.K," NBER Working Papers 9584, National Bureau of Economic Research, Inc.
  11. 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.
  12. Joshua Angrist & Alan Krueger, 1998. "Empirical Strategies in Labor Economics," Working Papers 780, Princeton University, Department of Economics, Industrial Relations Section..
  13. Philip Oreopoulos, 2003. "Do Dropouts Drop Out Too Soon? International Evidence From Changes in School-Leaving Laws," NBER Working Papers 10155, National Bureau of Economic Research, Inc.
  14. Orley Ashenfelter & Cecilia Rouse, 1998. "Income, Schooling, And Ability: Evidence From A New Sample Of Identical Twins," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 253-284, February.
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  16. Neumark, David, 1999. "Biases in twin estimates of the return to schooling," Economics of Education Review, Elsevier, vol. 18(2), pages 143-148, April.
  17. Michael Fertig & Jochen Kluve, 2005. "The Effect of Age at School Entry on Educational Attainment in Germany," RWI Discussion Papers 0027, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
  18. Costas Meghir & Mårten Palme, 2003. "Ability, parental background and educational policy: empirical evidence from a social experiment," IFS Working Papers W03/05, Institute for Fiscal Studies.
  19. Claudia Goldin & Lawrence Katz, 2003. "Mass Secondary Schooling and the State," NBER Working Papers 10075, National Bureau of Economic Research, Inc.
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  21. Sascha BECKER & Frank SIEBERN-THOMAS, 2001. "Returns to Education in Germany: A Variable Treatment Intensity Approach," Economics Working Papers ECO2001/09, European University Institute.
  22. Isacsson, Gunnar, 1999. "Estimates of the return to schooling in Sweden from a large sample of twins," Labour Economics, Elsevier, vol. 6(4), pages 471-489, November.
  23. Del Bono, Emilia & Galindo-Rueda, Fernando, 2004. "Do a Few Months of Compulsory Schooling Matter? The Education and Labour Market Impact of School Leaving Rules," IZA Discussion Papers 1233, Institute for the Study of Labor (IZA).
  24. Behrman, Jere R & Rosenzweig, Mark R & Taubman, Paul, 1994. "Endowments and the Allocation of Schooling in the Family and in the Marriage Market: The Twins Experiment," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1131-74, December.
  25. Colm Harmon & Ian Walker, 1995. "Estimates of the economic return to schooling for the United Kingdom," Open Access publications 10197/647, School of Economics, University College Dublin.
  26. Fertig, Michael & Kluve, Jochen, 2005. "The Effect of Age at School Entry on Educational Attainment in Germany," IZA Discussion Papers 1507, Institute for the Study of Labor (IZA).
  27. 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.
  28. Luiz M. Cruz & Marcelo J. Moreira, 2005. "On the Validity of Econometric Techniques with Weak Instruments: Inference on Returns to Education Using Compulsory School Attendance Laws," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
  29. Plug, Erik J. S., 2001. "Season of birth, schooling and earnings," Journal of Economic Psychology, Elsevier, vol. 22(5), pages 641-660, October.
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