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The Causal Effect of Education on Wages Revisited

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  • Matt Dickson

Abstract

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).

Suggested Citation

  • Matt Dickson, 2009. "The Causal Effect of Education on Wages Revisited," The Centre for Market and Public Organisation 09/220, The Centre for Market and Public Organisation, University of Bristol, UK.
  • Handle: RePEc:bri:cmpowp:09/220
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    Cited by:

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    2. Buscha, Franz & Dickson, Matt, 2015. "The Wage Returns to Education over the Life-Cycle: Heterogeneity and the Role of Experience," IZA Discussion Papers 9596, Institute of Labor Economics (IZA).
    3. Balestra, Simone & Backes-Gellner, Uschi, 2017. "Heterogeneous returns to education over the wage distribution: Who profits the most?," Labour Economics, Elsevier, vol. 44(C), pages 89-105.
    4. Ren, Yanjun & Zhang, Yanjie & Castro Campos, Bente & Loy, Jens-Peter, 2020. "Unhealthy consumption behaviors and their intergenerational persistence: The role of education," China Economic Review, Elsevier, vol. 62(C).
    5. Anneleen Vandeplas & Anna Thum-Thysen, 2019. "Skills Mismatch and Productivity in the EU," European Economy - Discussion Papers 2015 - 100, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Arabsheibani, Reza & Staneva, Anita, 2012. "Returns to Education in Russia: Where There Is Risky Sexual Behaviour There Is Also an Instrument," IZA Discussion Papers 6726, Institute of Labor Economics (IZA).
    7. Jesus Crespo Cuaresma & Anna Raggl, 2016. "The dynamics of returns to education in Uganda: National and subnational trends," Development Policy Review, Overseas Development Institute, vol. 34(3), pages 385-422, May.
    8. Gschwandtner, Adelina & Jewell, Sarah L. & Kambhampati, Uma, 2015. "On the Relationship between Lifestyle and Happiness in the UK," 89th Annual Conference, April 13-15, 2015, Warwick University, Coventry, UK 204199, Agricultural Economics Society.
    9. Matt Dickson, 2013. "The Causal Effect of Education on Wages Revisited," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(4), pages 477-498, August.
    10. Devereux, Paul J. & Fan, Wen, 2011. "Earnings returns to the British education expansion," Economics of Education Review, Elsevier, vol. 30(6), pages 1153-1166.
    11. Dorsett, Richard & Lui, Silvia & Weale, Martin, 2014. "Education and its effects on income and mortality of men aged sixty-five and over in Great Britain," Labour Economics, Elsevier, vol. 27(C), pages 71-82.
    12. Yao, Yao & Chen, George S. & Salim, Ruhul & Yu, Xiaojun, 2018. "Schooling returns for migrant workers in China: Estimations from the perspective of the institutional environment in a rural setting," China Economic Review, Elsevier, vol. 51(C), pages 240-256.
    13. Richard Dorsett & Silvia Lui & Martin Weale, 2016. "The effect of lifelong learning on men’s wages," Empirical Economics, Springer, vol. 51(2), pages 737-762, September.
    14. Ivar Kolstad & Arne Wiig, 2015. "Education and entrepreneurial success," Small Business Economics, Springer, vol. 44(4), pages 783-796, April.
    15. Muhammad Nauman Malik & Masood Sarwar Awan, 2016. "Analysing Econometric Bias and Non-linearity in Returns to Education of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(4), pages 837-851.
    16. Adamecz-Völgyi, Anna & Henderson, Morag & Shure, Nikki, 2020. "The Labor Market Returns to 'First in Family' University Graduates," IZA Discussion Papers 13911, Institute of Labor Economics (IZA).
    17. Dolton, Peter & Sandi, Matteo, 2017. "Returning to returns: revisiting the British education evidence," LSE Research Online Documents on Economics 85152, London School of Economics and Political Science, LSE Library.
    18. Kolstad, Ivar & Wiig, Arne & Moazzem, Khondaker Golam, 2014. "Returns to education among entrepreneurs in Bangladesh," Journal of Asian Economics, Elsevier, vol. 34(C), pages 54-65.
    19. Avendano, Mauricio & de Coulon, Augustin & Nafilyan, Vahé, 2020. "Does longer compulsory schooling affect mental health? Evidence from a British reform," Journal of Public Economics, Elsevier, vol. 183(C).
    20. Wang, Haining & Smyth, Russell & Cheng, Zhiming, 2017. "The economic returns to proficiency in English in China," China Economic Review, Elsevier, vol. 43(C), pages 91-104.
    21. Judith M. Delaney & Paul J. Devereux, 2019. "More Education, Less Volatility? The Effect of Education on Earnings Volatility over the Life Cycle," Journal of Labor Economics, University of Chicago Press, vol. 37(1), pages 101-137.
    22. Franz Buscha & Matt Dickson, 2018. "A Note on the Wage Effects of the 1972 Raising of the School Leaving Age in Scotland and Northern Ireland," Scottish Journal of Political Economy, Scottish Economic Society, vol. 65(5), pages 572-582, November.
    23. Dolton, Peter & Sandi, Matteo, 2017. "Returning to returns: Revisiting the British education evidence," Labour Economics, Elsevier, vol. 48(C), pages 87-104.
    24. Paul Gregg & Lindsey Macmillan, 2009. "Family Income and Education in the Next Generation: Exploring income gradients in education for current cohorts of youth," The Centre for Market and Public Organisation 09/223, The Centre for Market and Public Organisation, University of Bristol, UK.

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    More about this item

    Keywords

    human capital; endogeneity; local average treatment effect;
    All these keywords.

    JEL classification:

    • I20 - Health, Education, and Welfare - - Education - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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