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A Parametric Control Function Approach to Estimating the Returns to Schooling in the Absence of Exclusion Restrictions: An Application to the NLSY

  • Francis Vella

    (Georgetown University)

  • Lídia Farré

    (Universidad de Alicante)

  • Roger Klein

    (Rutgers University)

We estimate the return to education using a sample drawn from the National Longitudinal Survey of Youth 1979 (NLSY79). Rather than accounting for the endogeneity of schooling through the use of instrumental variables we employ a parametric version of the Klein and Vella (2006a) estimator. This estimator bypasses the need for instruments by exploiting features of the conditional second moments of the errors. As the Klein and Vella (2006a) procedure is semi-parametric it is computationally demanding. We illustrate how to greatly reduce the required computation by parameterizing the second moments. Accounting for endogeneity increases the estimate of the return to education by 5 percentage points, from 7.6% to 12.7%.

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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2008-16.

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Length: 30 pages
Date of creation: Oct 2008
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2008-16
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  1. James J. Heckman & Sergio Urzua & Edward Vytlacil, 2009. "Understanding Instrumental Variables in Models with Essential Heterogeneity," Working Papers 200941, Geary Institute, University College Dublin.
  2. Whitney K. Newey & James L. Powell & Francis Vella, 1999. "Nonparametric Estimation of Triangular Simultaneous Equations Models," Econometrica, Econometric Society, vol. 67(3), pages 565-604, May.
  3. Blackburn, McKinley L & Neumark, David, 1995. "Are OLS Estimates of the Return to Schooling Biased Downward? Another Look," The Review of Economics and Statistics, MIT Press, vol. 77(2), pages 217-30, May.
  4. Kling, Jeffrey R, 2001. "Interpreting Instrumental Variables Estimates of the Returns to Schooling," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 358-64, July.
  5. Flavio Cunha & James Heckman, 2007. "The Technology of Skill Formation," NBER Working Papers 12840, National Bureau of Economic Research, Inc.
  6. Esther Duflo, 2001. "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment," American Economic Review, American Economic Association, vol. 91(4), pages 795-813, September.
  7. David Card, 2000. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," NBER Working Papers 7769, National Bureau of Economic Research, Inc.
  8. Rummery, Sarah & Vella, Francis & Verbeek, Marno, 1999. "Estimating the returns to education for Australian youth via rank-order instrumental variables," Labour Economics, Elsevier, vol. 6(4), pages 491-507, November.
  9. Vincent Hogan & Roberto Rigobon, 2002. "Using Heteroscedasticity to Estimate the Returns to Education," NBER Working Papers 9145, National Bureau of Economic Research, Inc.
  10. Lance Lochner & Enrico Moretti, 2004. "The Effect of Education on Crime: Evidence from Prison Inmates, Arrests, and Self-Reports," American Economic Review, American Economic Association, vol. 94(1), pages 155-189, March.
  11. Klein, Roger & Vella, Francis, 2010. "Estimating a class of triangular simultaneous equations models without exclusion restrictions," Journal of Econometrics, Elsevier, vol. 154(2), pages 154-164, February.
  12. Lang, Kevin, 1993. "Ability Bias, Discount Rate Bias and the Return to Education," MPRA Paper 24651, University Library of Munich, Germany.
  13. Kane, Thomas J & Rouse, Cecilia Elena, 1995. "Labor-Market Returns to Two- and Four-Year College," American Economic Review, American Economic Association, vol. 85(3), pages 600-614, June.
  14. Joshua D. Angrist & Alan B. Krueger, 1990. "Does Compulsory School Attendance Affect Schooling and Earnings?," NBER Working Papers 3572, National Bureau of Economic Research, Inc.
  15. Harmon, Colm & Walker, Ian, 1995. "Estimates of the Economic Return to Schooling for the United Kingdom," American Economic Review, American Economic Association, vol. 85(5), pages 1278-86, December.
  16. Stephen V. Cameron & Christopher Taber, 2004. "Estimation of Educational Borrowing Constraints Using Returns to Schooling," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 132-182, February.
  17. Wooldridge, Jeffrey M., 2003. "Further results on instrumental variables estimation of average treatment effects in the correlated random coefficient model," Economics Letters, Elsevier, vol. 79(2), pages 185-191, May.
  18. Stephen V. Cameron & James J. Heckman, 2001. "The Dynamics of Educational Attainment for Black, Hispanic, and White Males," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 455-499, June.
  19. Stacey H. Chen, 2008. "Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 275-289, May.
  20. Groot, Wim & Maassen van den Brink, Henriette, 2000. "Overeducation in the labor market: a meta-analysis," Economics of Education Review, Elsevier, vol. 19(2), pages 149-158, April.
  21. Vella, Francis & Gregory, R. G., 1996. "Selection bias and human capital investment: Estimating the rates of return to education for young males," Labour Economics, Elsevier, vol. 3(2), pages 197-219, September.
  22. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  23. Dolton, Peter & Vignoles, Anna, 2000. "The incidence and effects of overeducation in the U.K. graduate labour market," Economics of Education Review, Elsevier, vol. 19(2), pages 179-198, April.
  24. Klein, Roger & Vella, Francis, 2006. "Estimating the Return to Endogenous Schooling Decisions for Australian Workers via Conditional Second Moments," IZA Discussion Papers 2407, Institute for the Study of Labor (IZA).
  25. Roger Klein & Francis Vella, 2009. "Estimating the Return to Endogenous Schooling Decisions via Conditional Second Moments," Journal of Human Resources, University of Wisconsin Press, vol. 44(4).
  26. Card, David, 1999. "The causal effect of education on earnings," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 30, pages 1801-1863 Elsevier.
  27. Rubb, S., 2003. "Overeducation in the labor market: a comment and re-analysis of a meta-analysis," Economics of Education Review, Elsevier, vol. 22(6), pages 621-629, December.
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