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A Structure Analysis of the Correlated Random Coefficient Wage Regression Model

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  • Belzil, Christian
  • Hansen, Jörgen

Abstract

We estimate a finite mixture dynamic programming model of schooling decisions in which the log wage regression function is set in a random coefficient framework. The model allows for absolute and comparative advantages in the labour market and assumes that the population is composed of eight unknown types. Overall, labour market skills (as opposed to taste for schooling) appear to be the prime factor explaining schooling attainments. The estimates indicate a higher cross-sectional variance in the returns to experience than in the returns to schooling. From various simulations, we find that the sub-population mostly affected by a counterfactual change in the utility of attending school is composed of individuals who have any combination of some of the following attributes: absolute advantages in the labour market, high returns to experience, low utility of attending school and relatively low returns to schooling. Unlike what is often postulated in the average treatment effect literature, the weak correlation (unconditional) between the returns to schooling and the individual reactions to treatment is not sufficient to reconcile the discrepancy between OLS and IV estimates of the returns to schooling often found in the literature.

Suggested Citation

  • Belzil, Christian & Hansen, Jörgen, 2002. "A Structure Analysis of the Correlated Random Coefficient Wage Regression Model," CEPR Discussion Papers 3601, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3601
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    Cited by:

    1. Zamarro, Gema, 2010. "Accounting for heterogeneous returns in sequential schooling decisions," Journal of Econometrics, Elsevier, vol. 156(2), pages 260-276, June.
    2. Belzil, Christian, 2007. "The return to schooling in structural dynamic models: a survey," European Economic Review, Elsevier, vol. 51(5), pages 1059-1105, July.
    3. Christian Belzil, 2008. "Testing the Specification of the Mincer Wage Equation," Annals of Economics and Statistics, GENES, issue 91-92, pages 427-451.
    4. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
    5. Ge, Suqin, 2013. "Estimating the returns to schooling: Implications from a dynamic discrete choice model," Labour Economics, Elsevier, vol. 20(C), pages 92-105.
    6. Belzil, Christian & Hansen, Jörgen & Kristensen, Nicolai, 2008. "Estimating Complementarity between Education and Training," IZA Discussion Papers 3882, Institute for the Study of Labor (IZA).
    7. Christian Belzil & Jörgen Hansen, 2002. "Earnings Dispersion, Risk Aversion and Education," CIRANO Working Papers 2002s-20, CIRANO.
    8. John K. Dagsvik & TorbjØrn HÆgeland & Arvid Raknerud, 2011. "Estimating the returns to schooling: a likelihood approach based on normal mixtures," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(4), pages 613-640, June.
    9. Christian Belzil, 2006. "Subjective beliefs and Schooling Decisions," Post-Print halshs-00265466, HAL.
    10. Belzil, Christian & Hansen, Jörgen & Liu, Xingfei, 2011. "Dynamic Skill Accumulation, Comparative Advantages, Compulsory Schooling, and Earnings," IZA Discussion Papers 6167, Institute for the Study of Labor (IZA).
    11. Holzner, Christian & Launov, Andrey, 2010. "Search equilibrium and social and private returns to education," European Economic Review, Elsevier, vol. 54(1), pages 39-59, January.
    12. Burgess, Simon, 2016. "Human Capital and Education: The State of the Art in the Economics of Education," IZA Discussion Papers 9885, Institute for the Study of Labor (IZA).
    13. Belzil, Christian & Hansen, Jörgen, 2008. "Calibration and IV Estimation of a Wage Outcome Equation in a Dynamic Environment," IZA Discussion Papers 3528, Institute for the Study of Labor (IZA).
    14. Belzil, Christian & Hansen, Jörgen, 2012. "The Timing of Earnings Sampling over the Life-Cycle and IV Identification of the Return to Schooling," IZA Discussion Papers 6724, Institute for the Study of Labor (IZA).
    15. Nielsen, Chantal Pohl, 2007. "Immigrant overeducation : evidence from Denmark," Policy Research Working Paper Series 4234, The World Bank.
    16. Heckman, James J. & Lochner, Lance J. & Todd, Petra E., 2006. "Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond," Handbook of the Economics of Education, Elsevier.
    17. Belzil, Christian & Hansen, Jörgen, 2010. "The Distinction between Dictatorial and Incentive Policy Interventions and its Implication for IV Estimation," IZA Discussion Papers 4835, Institute for the Study of Labor (IZA).
    18. Belzil, Christian & Hansen, Jörgen, 2005. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model with an Application to the OLS-IV Puzzle," IZA Discussion Papers 1585, Institute for the Study of Labor (IZA).
    19. repec:wly:quante:v:8:y:2017:i:3:p:895-927 is not listed on IDEAS
    20. Liu, Xingfei, 2014. "Educational Attainment of Second-Generation Immigrants: A U.S.-Canada Comparison," IZA Discussion Papers 8685, Institute for the Study of Labor (IZA).
    21. Biewen, Martin & Tapalaga, Madalina, 2017. "Early Tracking, Academic vs. Vocational Training and the Value of 'Second Chance' Options," IZA Discussion Papers 11080, Institute for the Study of Labor (IZA).
    22. Christian Belzil & Jorgen Hansen & Xingfei Liu, 2017. "Dynamic skill accumulation, education policies, and the return to schooling," Quantitative Economics, Econometric Society, vol. 8(3), pages 895-927, November.

    More about this item

    Keywords

    comparative advantages; dynamic programming; dynamic self-selection; random coefficient; returns to schooling;

    JEL classification:

    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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