Proxying ability by family background in returns to schooling estimations is generally a bad idea
A regression model is considered where earnings are explained by schooling and ability. It is assumed that schooling is measured with error and that there are no data on ability. Regressing earnings on observed schooling then yields an estimate of the return to schooling that is subject to positive omitted variable bias (OVB) and negative measurement error bias (MEB). The effects on the OVB and the MEB from using family background variables as proxies for ability are investigated theoretically and empirically. The theoretical analysis demonstrates that the impact on the OVB is uncertain, while the MEB invariably increases in magnitude. The empirical analysis shows that the MEB generally dominates the OVB. As the measurement error increases and/or more family background variables are added, the total bias rapidly becomes negative, driving the estimated return further and further away from the true value.
|Date of creation:||20 Oct 2008|
|Publication status:||Published in Scandinavian Journal of Economics, 2008, pages 853-875.|
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- Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
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IZA Discussion Papers
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- Hansen, Karsten T & Heckman, James J & Mullen, Kathleen J, 2003. "The effect of schooling and ability on achievement test scores," Working Paper Series 2003:13, IFAU - Institute for Evaluation of Labour Market and Education Policy.
- Isacsson, Gunnar, 1999. "Estimates of the return to schooling in Sweden from a large sample of twins," Labour Economics, Elsevier, vol. 6(4), pages 471-489, November.
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96-13, RAND - Reprint Series.
- Lam, David & Schoeni, Robert F, 1993. "Effects of Family Background on Earnings and Returns to Schooling: Evidence from Brazil," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 710-740, August.
- Welch, Finis, 1975. "Human Capital Theory: Education, Discrimination, and Life Cycles," American Economic Review, American Economic Association, vol. 65(2), pages 63-73, May.
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