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Heterogeneous Returns to Human Capital and Dynamic Self-Selection


  • Belzil, Christian

    () (Ecole Polytechnique, Paris)

  • Hansen, Jörgen

    () (Concordia University)


We estimate a structural dynamic programming model of schooling decisions and obtain individual specific estimates of the local (and average) returns to schooling as well as the returns to experience. Homogeneity of the returns to human capital is strongly rejected in favor of a discrete distribution version of the random coefficient specification. The results indicate that individuals who have the higher returns to schooling are also those who have the higher returns to experience. There is a 5.9 percentage points difference in the average return to schooling at college graduation between high and low market ability individuals (2.3% vs 8.2%) and a 5.4 percentage points difference in the return to experience upon entrance in the labor market (3.1% vs 8.5%). When averaged over all types, the return to experience in the early phase of the life cycle (6.8%) exceeds the average return to schooling (6.4% at college graduation). After condi-tioning on a specific type, the log wage regression function remains rather convex in schooling. The conflictual effects of the returns to schooling and experience on schooling decisions imply weak dynamic self-selection; that is educational attainments are only weakly correlated with individual differences in the returns to schooling.

Suggested Citation

  • Belzil, Christian & Hansen, Jörgen, 2001. "Heterogeneous Returns to Human Capital and Dynamic Self-Selection," IZA Discussion Papers 272, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp272

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    References listed on IDEAS

    1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    2. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 262-333, April.
    3. Kenneth I. Wolpin & Mark R. Rosenzweig, 2000. "Natural "Natural Experiments" in Economics," Journal of Economic Literature, American Economic Association, vol. 38(4), pages 827-874, December.
    4. Eckstein, Z. & Wolpin, K.I., 1997. "Youth Employment and Academic Perfomance in High School," Papers 24-97, Tel Aviv.
    5. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-475, March.
    6. James J. Heckman & Edward J. Vytlacil, 2000. "Local Instrumental Variables," NBER Technical Working Papers 0252, National Bureau of Economic Research, Inc.
    7. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
    8. Charles F. Manski & John V. Pepper, 2000. "Monotone Instrumental Variables, with an Application to the Returns to Schooling," Econometrica, Econometric Society, vol. 68(4), pages 997-1012, July.
    9. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
    10. James Heckman & Edward Vytlacil, 1998. "Instrumental Variables Methods for the Correlated Random Coefficient Model: Estimating the Average Rate of Return to Schooling When the Return is Correlated with Schooling," Journal of Human Resources, University of Wisconsin Press, vol. 33(4), pages 974-987.
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    Cited by:

    1. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
    2. Kohns, Stephan, 2001. "Testing for Asymmetry in British, German and US Unemployment Data," IZA Discussion Papers 341, Institute for the Study of Labor (IZA).
    3. Chiara Binelli, 2008. "Returns to Education and Increasing Wage Inequality in Latin America," Working Paper series 30_08, Rimini Centre for Economic Analysis.
    4. Katja Kaufmann, 2008. "Understanding the Income Gradient in College Attendance in Mexico: The Role of Heterogeneity in Expected Returns to College," Discussion Papers 07-040, Stanford Institute for Economic Policy Research.

    More about this item


    Local returns to schooling; average returns; dynamic programming; dynamic self-selection;

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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