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Unobserved Ability and the Return to schooling++

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  • Christian Belzil

    (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique, ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique, IZA - Institute for the Study of Labor)

Abstract

We estimate a structural dynamic programming model of schooling decisions with unobserved heterogeneity in school ability and market ability on a sample taken from the National Longitudinal Survey of Youth (NLSY). Both the instantaneous utility of attending school and the wage regression function are estimated flexibly. The null hypothesis that the local returns to schooling are constant is strongly rejected in favor of a convex wage regression function composed of 8 spline segments. The local returns are very low until grade 11 (1% per year or less), increase to 3.7% in grade 12 and exceed 10% only from grade 14 to grade 16. The average return increases smoothly from 0.4% (grade 7) to 4.6% (grade 16). The convexity of the log wage regression function implies that those who obtain more schooling also experience higher average returns. We strongly reject the null hypothesis that unobserved market ability is uncorrelated with realized schooling attainments, which underlies many previous studies that have used OLS to estimate the return to schooling. The correlation between realized schooling and market ability is found to be positive and is consistent with the existence of a positive “Ability Bias”.
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Suggested Citation

  • Christian Belzil, 2002. "Unobserved Ability and the Return to schooling++," Post-Print hal-00541872, HAL.
    • Handle: RePEc:hal:journl:hal-00541872
    DOI: 10.1111/1468-0262.00365
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    References listed on IDEAS

    as
    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. Belzil, Christian & Hansen, Jorgen, 2007. "A structural analysis of the correlated random coefficient wage regression model," Journal of Econometrics, Elsevier, vol. 140(2), pages 827-848, October.
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    7. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
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    14. Lang, Kevin, 1993. "Ability Bias, Discount Rate Bias and the Return to Education," MPRA Paper 24651, University Library of Munich, Germany.
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    More about this item

    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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