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Qualifications and earnings in Britain: how reliable are conventional OLS estimates of the returns to education?

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  • Lorraine Dearden

    () (Institute for Fiscal Studies and Department of Social Science, University College London)

Abstract

The paper estimates the returns to education for a cohort of individuals born in Britain in March 1958 who have been followed since birth until the age of 33. The data used has a wealth of information on family background including parental education, social class and interest shown in the child's education as well as measures of ability. The nature of our data allows us to directly assess the relative importance of omitted ability and family background bias as well as biases arising from measurement error in education qualification variables which have been found to be important in other studies. The paper also looks at possible biases arising from compositional differences between individuals in work and those out of work. This 'Composition bias' arising from self-selection into employment is generally ignored in the returns to schooling literature and is why most studies focus only on men (for whom it is assumed this is much less of a problem). The paper also examines whether there is evidence of heterogeneity in the returns to education as well as the impact of education on gender wage differentials. The paper finds that conventional OLS estimates, which assume that education is exogenous, are reasonable estimates of the true causal impact of education on wages. In the UK it would appear that the effects of measurement error bias and composition bias directly offset the countervailing effect of unobserved ability and family background bias for most qualifications. The results from the paper suggest that conventional OLS estimates of the returns to education can generally be relied upon for policy decisions. The paper also finds evidence of heterogeneity in the returns to education in Britain. The results from the paper suggest that individuals undertaking schooling involving some sort of formal qualification have significantly larger rates of return than individuals who complete the same number of years of schooling but who obtain no formal qualifications. There is also some evidence that individuals with lower tastes for education, have significantly higher marginal returns to certain education qualifications. We also find that post-school qualifications, particularly degree qualifications, play an important role in reducing gender wage differentials. The data used has a wealth of information on family background including parental education, social class and interest shown in the child's education as well as measures of ability. The nature of our data allows us to directly assess the relative importance of omitted ability and family background bias as well as biases arising from measurement error in education qualification variables which have been found to be important in other studies. The paper also looks at possible biases arising from compositional differences between individuals in work and those out of work. This 'Composition bias' arising from self-selection into employment is generally ignored in the returns to schooling literature and is why most studies focus only on men (for whom it is assumed this is much less of a problem). The paper also examines whether there is evidence of heterogeneity in the returns to education as well as the impact of education on gender wage differentials. The paper finds that conventional OLS estimates, which assume that education is exogenous, are reasonable estimates of the true causal impact of education on wages. In the UK it would appear that the effects of measurement error bias and composition bias directly offset the countervailing effect of unobserved ability and family background bias for most qualifications. The results from the paper suggest that conventional OLS estimates of the returns to education can generally be relied upon for policy decisions. The paper also finds evidence of heterogeneity in the returns to education in Britain. The results from the paper suggest that individuals undertaking schooling involving some sort of formal qualification have significantly larger rates of return than individuals who complete the same number of years of schooling but who obtain no formal qualifications. There is also some evidence that individuals with lower tastes for education, have significantly higher marginal returns to certain education qualifications. We also find that post-school qualifications, particularly degree qualifications, play an important role in reducing gender wage differentials.

Suggested Citation

  • 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.
  • Handle: RePEc:ifs:ifsewp:99/07
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    File URL: http://www.ifs.org.uk/wps/wp9907.pdf
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    References listed on IDEAS

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    Cited by:

    1. Maurin, Eric & McNally, Sandra, 2005. "Vive la revolution! Long term returns of 1968 to the angry students," LSE Research Online Documents on Economics 3656, London School of Economics and Political Science, LSE Library.
    2. Steven Mcintosh, 2006. "Further Analysis of the Returns to Academic and Vocational Qualifications," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(2), pages 225-251, April.
    3. Battistin, Erich & De Nadai, Michele & Sianesi, Barbara, 2014. "Misreported schooling, multiple measures and returns to educational qualifications," Journal of Econometrics, Elsevier, vol. 181(2), pages 136-150.
    4. Dearden, Lorraine, et al, 2002. "The Returns to Academic and Vocational Qualifications in Britain," Bulletin of Economic Research, Wiley Blackwell, vol. 54(3), pages 249-274, July.
    5. Simone N. Tuor & Uschi Backes-Gellner, 2010. "Risk-return trade-offs to different educational paths: vocational, academic and mixed," International Journal of Manpower, Emerald Group Publishing, vol. 31(5), pages 495-519, August.
    6. Christian Dustmann & Francesca Fabbri, 2003. "Language proficiency and labour market performance of immigrants in the UK," Economic Journal, Royal Economic Society, vol. 113(489), pages 695-717, July.
    7. Tsung-Ping Chung, 2000. "The Returns to Education and Training: Evidence from the Malaysian Family Life Surveys," Studies in Economics 0007, School of Economics, University of Kent.
    8. Galindo-Rueda, Fernando & Vignoles, Anna, 2002. "Class Ridden or Meritocratic? An Economic Analysis of Recent Changes in Britain," IZA Discussion Papers 677, Institute for the Study of Labor (IZA).
    9. David Campbell, 2001. "Rates of Return to Schooling and the Quality of Education in England and Wales," Studies in Economics 0115, School of Economics, University of Kent.
    10. Dickson, Matt & Smith, Sarah, 2011. "What determines the return to education: An extra year or a hurdle cleared?," Economics of Education Review, Elsevier, vol. 30(6), pages 1167-1176.
    11. Dorothe Bonjour & Lynn F. Cherkas & Jonathan E. Haskel & Denise D. Hawkes & Tim D. Spector, 2003. "Returns to Education: Evidence from U.K. Twins," American Economic Review, American Economic Association, vol. 93(5), pages 1799-1812, December.
    12. Lindley, Joanne, 2009. "The over-education of UK immigrants and minority ethnic groups: Evidence from the Labour Force Survey," Economics of Education Review, Elsevier, vol. 28(1), pages 80-89, February.
    13. Richard Blundell & Lorraine Dearden & Barbara Sianesi, 2003. "Evaluating the impact of education on earnings in the UK: Models, methods and results from the NCDS," IFS Working Papers W03/20, Institute for Fiscal Studies.
    14. Dearden, Lorraine, 1999. "The effects of families and ability on men's education and earnings in Britain1," Labour Economics, Elsevier, vol. 6(4), pages 551-567, November.
    15. Erich Battistin & Barbara Sianesi, 2006. "Misreported schooling and returns to education: evidence from the UK," CeMMAP working papers CWP07/06, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    16. Bratti, Massimiliano & Naylor, Robin & Smith, Jeremy, 2007. "Different returns to different degrees? Evidence from the British Cohort Study 1970," The Warwick Economics Research Paper Series (TWERPS) 783, University of Warwick, Department of Economics.
    17. Lorraine Dearden & Barbara Sianesi, 2001. "Estimating the Returns to Education: Models, Methods and Results," CEE Discussion Papers 0016, Centre for the Economics of Education, LSE.
    18. Philip Trostel & Ian Walker, 2006. "Education and Work," Education Economics, Taylor & Francis Journals, vol. 14(4), pages 377-399.
    19. Angel de la Fuente & Antonio Ciccone, 2003. "Human capital in a global and knowledge-based economy," UFAE and IAE Working Papers 562.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    20. Bratti, Massimiliano & Naylor, Robin & Smith, Jeremy, 2005. "Variations in the Wage Returns to a First Degree: Evidence from the British Cohort Study 1970," IZA Discussion Papers 1631, Institute for the Study of Labor (IZA).
    21. 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.
    22. Anne Gasteen & John Houston, 2007. "Employability and Earnings Returns to Qualifications in Scotland," Regional Studies, Taylor & Francis Journals, vol. 41(4), pages 443-452.
    23. Nigel O'leary & Peter Sloane, 2008. "Rates of Return to Degrees across British Regions," Regional Studies, Taylor & Francis Journals, vol. 42(2), pages 199-213.
    24. Gavan Conlon, 2001. "The differential in earnings premia between academically and vocationally trained males in the United Kingdom," CEE Discussion Papers 0011, Centre for the Economics of Education, LSE.
    25. Joanne Kathryn Lindley & Pamela Lenton, 2006. "The Over-Education of UK Immigrants: Evidence from the Labour Force Survey," Working Papers 2006001, The University of Sheffield, Department of Economics, revised Jan 2006.

    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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