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Estimates of the economic return to schooling for the UK

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  • Harmon, Harmon

    (Institute for Fiscal Studies)

  • Ian Walker

    () (Institute for Fiscal Studies and Lancaster University)

Abstract

This paper estimates the impact of schooling on the wages of men. It is important to know what the return on educational investments might be since a high return implies that there might be too little of such investments. The major preoccupation in this literature has been attempting to unravel the simultaneous relationship between schooling and wages. That is, wages depend on schooling since schooling enhances human capital, but schooling decisions depend on wages for one or more of a number of reasons - for example, individuals will invest in more schooling the greater is the return to that schooling. Traditional estimates of the return to an additional year of schooling in the UK suggest that this is in of the order of 7%. However, the results here suggest much larger figures - perhaps in the order of 20%. We use a large sample of UK males to address the potential endogeneity of schooling. By exploiting the experimental nature of two changes in the minimum school leaving age to uncover the effect of an exogenous increase in schooling on wages. Our results confirm recent US work. For example, Card (1993) and Butcher and Case (1994) suggest that the estimates of schooling returns using such methods are almost double that of simple least squares methods. However, the results here provide much greater precision than has previously been the case and so substantiate the US evidence of much larger rates of return to education than traditionally thought.

Suggested Citation

  • Harmon, Harmon & Ian Walker, 1995. "Estimates of the economic return to schooling for the UK," IFS Working Papers W95/12, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:95/12
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    References listed on IDEAS

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    1. Marcet, Albert & Singleton, Kenneth J., 1999. "Equilibrium Asset Prices And Savings Of Heterogeneous Agents In The Presence Of Incomplete Markets And Portfolio Constraints," Macroeconomic Dynamics, Cambridge University Press, pages 243-277.
    2. Joseph G. Altonji & Aloysius Siow, 1987. "Testing the Response of Consumption to Income Changes with (Noisy) Panel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 293-328.
    3. Altug, Sumru & Miller, Robert A, 1990. "Household Choices in Equilibrium," Econometrica, Econometric Society, vol. 58(3), pages 543-570, May.
    4. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
    5. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-445, March.
    6. Marcet, Albert & Singleton, Kenneth J., 1999. "Equilibrium Asset Prices And Savings Of Heterogeneous Agents In The Presence Of Incomplete Markets And Portfolio Constraints," Macroeconomic Dynamics, Cambridge University Press, pages 243-277.
    7. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
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