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A Structural Analysis of the Correlated Random Coefficient Wage Regression Model

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  • 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.

Suggested Citation

  • Christian Belzil & Jörgen Hansen, 2004. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model," Working Papers 0405, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    • Handle: RePEc:gat:wpaper:0405
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    Cited by:

    1. Tillmann Heidelk, 2019. "The Returns to Education in the Context of a Natural Disaster: Evidence from the 2010 Earthquake in Haiti," Working Papers ECARES 2019-17, ULB -- Universite Libre de Bruxelles.
    2. Zamarro, Gema, 2010. "Accounting for heterogeneous returns in sequential schooling decisions," Journal of Econometrics, Elsevier, vol. 156(2), pages 260-276, June.
    3. Belzil, Christian, 2007. "The return to schooling in structural dynamic models: a survey," European Economic Review, Elsevier, vol. 51(5), pages 1059-1105, July.
    4. Christian Belzil, 2008. "Testing the Specification of the Mincer Wage Equation," Annals of Economics and Statistics, GENES, issue 91-92, pages 427-451.
    5. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
    6. Ge, Suqin, 2013. "Estimating the returns to schooling: Implications from a dynamic discrete choice model," Labour Economics, Elsevier, vol. 20(C), pages 92-105.
    7. Belzil, Christian & Hansen, Jörgen & Kristensen, Nicolai, 2008. "Estimating Complementarity between Education and Training," IZA Discussion Papers 3882, Institute of Labor Economics (IZA).
    8. Belzil, Christian & Hansen, Jörgen, 2002. "Earnings Dispersion, Risk Aversion and Education," CEPR Discussion Papers 3600, C.E.P.R. Discussion Papers.
    9. 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.
    10. Christian Belzil, 2006. "Subjective beliefs and Schooling Decisions," Post-Print halshs-00265466, HAL.
    11. Belzil, Christian & Hansen, Jörgen & Liu, Xingfei, 2011. "Dynamic Skill Accumulation, Comparative Advantages, Compulsory Schooling, and Earnings," IZA Discussion Papers 6167, Institute of Labor Economics (IZA).
    12. 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.
    13. Burgess, Simon, 2016. "Human Capital and Education: The State of the Art in the Economics of Education," IZA Discussion Papers 9885, Institute of Labor Economics (IZA).
    14. Belzil, Christian & Hansen, Jörgen, 2008. "Calibration and IV Estimation of a Wage Outcome Equation in a Dynamic Environment," IZA Discussion Papers 3528, Institute of Labor Economics (IZA).
    15. 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 of Labor Economics (IZA).
    16. Nielsen, Chantal Pohl, 2007. "Immigrant overeducation : evidence from Denmark," Policy Research Working Paper Series 4234, The World Bank.
    17. 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, in: Erik Hanushek & F. Welch (ed.), Handbook of the Economics of Education, edition 1, volume 1, chapter 7, pages 307-458, Elsevier.
    18. Belzil, Christian & Hansen, Jörgen, 2010. "The Distinction between Dictatorial and Incentive Policy Interventions and its Implication for IV Estimation," IZA Discussion Papers 4835, Institute of Labor Economics (IZA).
    19. 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 of Labor Economics (IZA).
    20. 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.
    21. Liu, Xingfei, 2014. "Educational Attainment of Second-Generation Immigrants: A U.S.-Canada Comparison," IZA Discussion Papers 8685, Institute of Labor Economics (IZA).
    22. Biewen, Martin & (neé Tapalaga), Madalina Thiele, 2020. "Early tracking, academic vs. vocational training, and the value of ‘second-chance’ options," Labour Economics, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    Random Coefficient; Returns to Schooling; Comparative Advantages; Dynamic Programming; Dynamic Self-Selection;
    All these keywords.

    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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