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The marginal and average returns to schooling

Author

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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 earnings of men. It is important to know what the return to educational investments might be since a high return to such investments may imply that individuals, for whatever reason, are investing in too little schooling. The major preoccupation in this literature has been the attempt 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 more in schooling the greater is the return to that schooling. Traditional estimates of the return to an additional year of schooling in the UK has suggested that this return is of the order of 7%. However, several recent US studies and our earlier work (Harmon and Walker, American Economic Review, December 1995), based on UK data, suggest a much larger figure - in excess of 15%. This earlier work made the critical assumption that wages are linearly related to years of schooling and exploited the changes in the minimum school leaving age that have occurred in the UK to infer the returns to an exogenous increase in the amount of schooling. This paper examines the robustness of this important result to the linearity assumption and to the way in which we infer the effect of an exogenous increase in education. Effectively, we use the variety of changes that have occurred in education policy since the Second World War and variations in youth labour markets to provide an estimate of the effect of an additional year of schooling on male earnings. Our current analysis uses the General Household Survey, pooled from 1974 to 1994, and finds that the results in our earlier work are surprisingly robust. We find that the estimated schooling/earnings relationship is close to linear and the estimates are essentially independent of how we unravel the simultaneity between schooling and wages.

Suggested Citation

  • Harmon, Harmon & Ian Walker, 1996. "The marginal and average returns to schooling," IFS Working Papers W96/11, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:96/11
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    Cited by:

    1. Ichino, Andrea & Winter-Ebmer, Rudolf, 1999. "Lower and upper bounds of returns to schooling: An exercise in IV estimation with different instruments," European Economic Review, Elsevier, vol. 43(4-6), pages 889-901, April.
    2. Florence Arestoff, 2000. "Taux de rendement de l’éducation sur le marché du travail d’un pays en développement Un réexamen du modèle de gains de Mincer," Working Papers DT/2000/11, DIAL (Développement, Institutions et Mondialisation).
    3. Adriaan Kalwij, 2000. "Estimating the economic return to schooling on the basis of panel data," Applied Economics, Taylor & Francis Journals, vol. 32(1), pages 61-71.
    4. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2003. "Dispersion in the economic return to schooling," Labour Economics, Elsevier, vol. 10(2), pages 205-214, April.
    5. Sonia Bhalotra & Claudia Sanhueza, 2004. "Parametric and Semi-parametric Estimations of the Return to Schooling in South Africa," Econometric Society 2004 Latin American Meetings 294, Econometric Society.
    6. MacDonald, Ziggy & Shields, Michael A, 2001. "The Impact of Alcohol Consumption on Occupational Attainment in England," Economica, London School of Economics and Political Science, vol. 68(271), pages 427-453, August.
    7. Peter Dolton, 2001. "Over education in the graduate labour market: Some evidence from alumni data," CEE Discussion Papers 0009, Centre for the Economics of Education, LSE.
    8. Chib, Siddhartha & Jacobi, Liana, 2011. "Returns to Compulsory Schooling in Britain: Evidence from a Bayesian Fuzzy Regression Discontinuity Analysis," IZA Discussion Papers 5564, Institute for the Study of Labor (IZA).
    9. Massimiliano BRATTI & Luca MANCINI, 2003. "Differences in Early Occupational Earnings of UK Male Graduates by Degree Subject: Evidence from the 1980-1993 USR," Working Papers 189, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    10. Concetta, MENDOLICCHIO, 2006. "A Disaggregate Analysis of Private Returns to Education in Italy," Discussion Papers (ECON - Département des Sciences Economiques) 2006054, Université catholique de Louvain, Département des Sciences Economiques.
    11. Kevin Denny & Harmon, Harmon & Sandra Redmond, 2000. "Functional literacy, educational attainment and earnings - evidence from the international adult literacy survey," IFS Working Papers W00/09, Institute for Fiscal Studies.
    12. Michael A. Shields & Stephen Wheatley Price, 2002. "The English language fluency and occupational success of ethnic minority immigrant men living in English metropolitan areas," Journal of Population Economics, Springer;European Society for Population Economics, vol. 15(1), pages 137-160.
    13. Lorraine Dearden, 1999. "Qualifications and earnings in Britain: how reliable are conventional OLS estimates of the returns to education?," IFS Working Papers W99/07, Institute for Fiscal Studies.
    14. George Psacharopoulos & Harry Anthony Patrinos, 2004. "Returns to investment in education: a further update," Education Economics, Taylor & Francis Journals, vol. 12(2), pages 111-134.
    15. Lloyd Ahamefule AMAGHIONYEODIWE & Tokunbo Simbowale OSINUBI, 2007. "Do Higher Levels Of Schooling Lead To Higher Returns To Education In Nigeria?," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(1).
    16. Trostel, P.A., 2000. "Micro Evidence on Human Capital as the Engine of Growth," The Warwick Economics Research Paper Series (TWERPS) 555, University of Warwick, Department of Economics.
    17. Angel López-Nicolás & Jaume García & Pedro J. Hernández, 2001. "How wide is the gap? An investigation of gender wage differences using quantile regression," Empirical Economics, Springer, vol. 26(1), pages 149-167.
    18. Philip A. Trostel, 2005. "Nonlinearity in the return to education," Journal of Applied Economics, Universidad del CEMA, vol. 8, pages 191-202, May.

    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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