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A Structural Analysis of the Correlated Random Coefficient Wage Regression Model

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Listed author(s):
  • Christian Belzil

    ()

    (GATE CNRS)

  • Jörgen Hansen

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. We also analyze the determinants of 3 counterfactual experiments (a college attendance subsidy, a high school graduation subsidy and an overall decrease in the rate of time preference) and examine a proposition often claimed in the “Average Treatment Effects” literature; that the discrepancy between OLS and IV estimates of the returns to schooling may be explained by the relatively higher returns experienced by those affected by exogenous policy changes. We find that the average return to experience upon entering the labor market (0.0863) exceeds the average return to schooling (0.0576) and we find more cross-sectional variability in the returns to experience than in the returns to schooling. Labor market skills (as opposed to taste for schooling) appear to be the prime factor explaining schooling attainments. We find little evidence in favor of a positive correlation between reactions induced by an exogenous experiment and the individual specific returns to schooling.

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File URL: ftp://ftp.gate.cnrs.fr/RePEc/2004/0405.pdf
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Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0405.

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Length: 44 pages
Date of creation: Jan 2004
Handle: RePEc:gat:wpaper:0405
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Keywords: Random Coefficient; Returns to Schooling; Comparative Advantages; Dynamic Programming; Dynamic Self-Selection;

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Find related papers by JEL classification:
  • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
  • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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  1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  2. Willis, Robert J & Rosen, Sherwin, 1979. "Education and Self-Selection," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 7-36, October.
  3. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 262-333, April.
  4. Christian Belzil, 2003. "Structural Estimates of the Intergenerational Education Correlation," Post-Print hal-00541883, HAL.
  5. Kenneth I. Wolpin & Mark R. Rosenzweig, 2000. "Natural "Natural Experiments" in Economics," Journal of Economic Literature, American Economic Association, vol. 38(4), pages 827-874, December.
  6. James J. Heckman & Edward Vytlacil, 2005. "Structural Equations, Treatment Effects, and Econometric Policy Evaluation," Econometrica, Econometric Society, vol. 73(3), pages 669-738, 05.
  7. Eckstein, Z. & Wolpin, K.I., 1997. "Youth Employment and Academic Perfomance in High School," Papers 24-97, Tel Aviv.
  8. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
  9. Thierry Magnac & David Thesmar, 2002. "Identifying Dynamic Discrete Decision Processes," Econometrica, Econometric Society, vol. 70(2), pages 801-816, March.
  10. V. Joseph Hotz & Robert A. Miller, 1993. "Conditional Choice Probabilities and the Estimation of Dynamic Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 497-529.
  11. Costas Meghir & Mårten Palme, 2001. "The effect of a social experiment in education," IFS Working Papers W01/11, Institute for Fiscal Studies.
  12. Joshua D. Angrist & Alan B. Keueger, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 979-1014.
  13. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
  14. Charles F. Manski & John V. Pepper, 2000. "Monotone Instrumental Variables, with an Application to the Returns to Schooling," Econometrica, Econometric Society, vol. 68(4), pages 997-1012, July.
  15. Wooldridge, Jeffrey M., 1997. "On two stage least squares estimation of the average treatment effect in a random coefficient model," Economics Letters, Elsevier, vol. 56(2), pages 129-133, October.
  16. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  17. Robert M. Sauer, 2004. "Educational Financing and Lifetime Earnings," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1189-1216.
  18. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-475, March.
  19. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-1160, September.
  20. James J. Heckman & Edward J. Vytlacil, 2000. "Local Instrumental Variables," NBER Technical Working Papers 0252, National Bureau of Economic Research, Inc.
  21. Jean-Pierre Florens & James Heckman & Costas Meghir & Edward Vytlacil, 2002. "Instrumental variables, local instrumental variables and control functions," CeMMAP working papers CWP15/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  22. Card, David, 1999. "The causal effect of education on earnings," Handbook of Labor Economics,in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 30, pages 1801-1863 Elsevier.
  23. Edward Vytlacil, 2002. "Independence, Monotonicity, and Latent Index Models: An Equivalence Result," Econometrica, Econometric Society, vol. 70(1), pages 331-341, January.
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