IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp5788.html
   My bibliography  Save this paper

Life-Cycle Bias and the Returns to Schooling in Current and Lifetime Earnings

Author

Listed:
  • Bhuller, Manudeep

    (University of Oslo)

  • Mogstad, Magne

    (University of Chicago)

  • Salvanes, Kjell G.

    (Norwegian School of Economics)

Abstract

This paper uses a unique data set with nearly career-long earnings histories to provide evidence on the returns to schooling in current and lifetime earnings. We use these results to assess the importance of life-cycle bias in earnings regressions using current earnings as a proxy for lifetime earnings. To account for the endogeneity of schooling, we apply three commonly used identification strategies. Our estimates demonstrate a strong life-cycle bias, often exceeding the bias from assuming that schooling is exogenous. We further explore the problems caused by life-cycle bias in research on the economic returns to schooling, and discuss possible remedies.

Suggested Citation

  • Bhuller, Manudeep & Mogstad, Magne & Salvanes, Kjell G., 2011. "Life-Cycle Bias and the Returns to Schooling in Current and Lifetime Earnings," IZA Discussion Papers 5788, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp5788
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp5788.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Willis, Robert J & Rosen, Sherwin, 1979. "Education and Self-Selection," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 7-36, October.
    2. Øivind Anti Nilsen & Kjell Vaage & Arild Aakvik & Karl Jacobsen, 2012. "Intergenerational Earnings Mobility Revisited: Estimates Based on Lifetime Earnings," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(1), pages 1-23, March.
    3. 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.
    4. Anders Bohlmark & Matthew J. Lindquist, 2006. "Life-Cycle Variations in the Association between Current and Lifetime Income: Replication and Extension for Sweden," Journal of Labor Economics, University of Chicago Press, vol. 24(4), pages 879-900, October.
    5. Aakvik, Arild & Salvanes, Kjell G. & Vaage, Kjell, 2010. "Measuring heterogeneity in the returns to education using an education reform," European Economic Review, Elsevier, vol. 54(4), pages 483-500, May.
    6. Martin Nybom & Jan Stuhler, 2016. "Heterogeneous Income Profiles and Lifecycle Bias in Intergenerational Mobility Estimation," Journal of Human Resources, University of Wisconsin Press, vol. 51(1), pages 239-268.
    7. Steven Haider & Gary Solon, 2006. "Life-Cycle Variation in the Association between Current and Lifetime Earnings," American Economic Review, American Economic Association, vol. 96(4), pages 1308-1320, September.
    8. Aaberge, Rolf & Mogstad, Magne & Peragine, Vito, 2011. "Measuring long-term inequality of opportunity," Journal of Public Economics, Elsevier, vol. 95(3), pages 193-204.
    9. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," Journal of Human Capital, University of Chicago Press, vol. 2(1), pages 1-31.
    10. Griliches, Zvi, 1979. "Sibling Models and Data in Economics: Beginnings of a Survey," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 37-64, October.
    11. O. Ashenfelter & D. Card (ed.), 1999. "Handbook of Labor Economics," Handbook of Labor Economics, Elsevier, edition 1, volume 3, number 3.
    12. Sandra E. Black & Paul J. Devereux & Kjell G. Salvanes, 2005. "Why the Apple Doesn't Fall Far: Understanding Intergenerational Transmission of Human Capital," American Economic Review, American Economic Association, vol. 95(1), pages 437-449, March.
    13. Heckman, James J. & Lochner, Lance J. & Todd, Petra E., 2006. "Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond," Handbook of the Economics of Education, in: Erik Hanushek & F. Welch (ed.), Handbook of the Economics of Education, edition 1, volume 1, chapter 7, pages 307-458, Elsevier.
    14. Torbjørn Haegeland & Tor Jakob Klette & Kjell G. Salvanes, 1999. "Declining Returns to Education in Norway? Comparing Estimates across Cohorts, Sectors and over Time," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 555-576, December.
    15. Cowell, Frank, 2011. "Measuring Inequality," OUP Catalogue, Oxford University Press, edition 3, number 9780199594047.
    16. Bound, John & Solon, Gary, 1999. "Double trouble: on the value of twins-based estimation of the return to schooling," Economics of Education Review, Elsevier, vol. 18(2), pages 169-182, April.
    17. Brenner, Jan, 2010. "Life-cycle variations in the association between current and lifetime earnings: Evidence for German natives and guest workers," Labour Economics, Elsevier, vol. 17(2), pages 392-406, April.
    18. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, July.
    19. Gunnar Isacsson, 2004. "Estimating the economic return to educational levels using data on twins," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 99-119.
    20. Jan Leonard Stuhler, 2010. "Empirical Strategies to Eliminate Life-Cycle Bias in the Intergenerational Elasticity of Earnings Literature," SOEPpapers on Multidisciplinary Panel Data Research 346, DIW Berlin, The German Socio-Economic Panel (SOEP).
    21. 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.
    22. Thomas Lemieux, 2008. "The changing nature of wage inequality," Journal of Population Economics, Springer;European Society for Population Economics, vol. 21(1), pages 21-48, January.
    23. A. B. Atkinson, 2005. "Top incomes in the UK over the 20th century," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 168(2), pages 325-343, March.
    24. Philip Oreopoulos, 2006. "Estimating Average and Local Average Treatment Effects of Education when Compulsory Schooling Laws Really Matter," American Economic Review, American Economic Association, vol. 96(1), pages 152-175, March.
    25. Haegeland, Torbjorn & Klette, Tor Jakob & Salvanes, Kjell G, 1999. " Declining Returns to Education in Norway? Comparing Estimates across Cohorts, Sectors and Over Time," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 555-576, December.
    26. Colm Harmon & Hessel Oosterbeek & Ian Walker, 2003. "The Returns to Education: Microeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 17(2), pages 115-156, April.
    27. Devereux, Paul J. & Fan, Wen, 2011. "Earnings returns to the British education expansion," Economics of Education Review, Elsevier, vol. 30(6), pages 1153-1166.
    28. Jacob Mincer, 1958. "Investment in Human Capital and Personal Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 66(4), pages 281-281.
    29. Ashenfelter, Orley & Krueger, Alan B, 1994. "Estimates of the Economic Returns to Schooling from a New Sample of Twins," American Economic Review, American Economic Association, vol. 84(5), pages 1157-1173, December.
    30. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-1160, September.
    31. Jacob A. Mincer, 1974. "Schooling and Earnings," NBER Chapters, in: Schooling, Experience, and Earnings, pages 41-63, National Bureau of Economic Research, Inc.
    32. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Manudeep Bhuller & Magne Mogstad & Kjell G. Salvanes, 2017. "Life-Cycle Earnings, Education Premiums, and Internal Rates of Return," Journal of Labor Economics, University of Chicago Press, vol. 35(4), pages 993-1030.
    2. 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).
    3. Hanushek, Eric A. & Schwerdt, Guido & Wiederhold, Simon & Woessmann, Ludger, 2015. "Returns to skills around the world: Evidence from PIAAC," European Economic Review, Elsevier, vol. 73(C), pages 103-130.
    4. Reuben Gronau, 2010. "Zvi Griliches' Contribution to the Theory of Human Capital," NBER Chapters, in: Contributions in Memory of Zvi Griliches, pages 275-297, National Bureau of Economic Research, Inc.
    5. Denis Maguain, 2007. "Les rendements de l'éducation en comparaison internationale," Économie et Prévision, Programme National Persée, vol. 180(4), pages 87-106.
    6. Eric A. Hanushek & Ludger Woessmann, 2008. "The Role of Cognitive Skills in Economic Development," Journal of Economic Literature, American Economic Association, vol. 46(3), pages 607-668, September.
    7. Mirjam van Praag & Arjen van Witteloostuijn & Justin van der Sluis, 2009. "Returns for Entrepreneurs versus Employees: The Effect of Education and Personal Control on the Relative Performance of Entrepreneurs vis-a-vis Wage Employees," Tinbergen Institute Discussion Papers 09-111/3, Tinbergen Institute.
    8. Serneels, Pieter & Beegle, Kathleen & Dillon, Andrew, 2017. "Do returns to education depend on how and whom you ask?," Economics of Education Review, Elsevier, vol. 60(C), pages 5-19.
    9. Brunello, Giorgio & Weber, Guglielmo & Weiss, Christoph T., 2012. "Books Are Forever: Early Life Conditions, Education and Lifetime Income," IZA Discussion Papers 6386, Institute of Labor Economics (IZA).
    10. Belzil, Christian, 2007. "The return to schooling in structural dynamic models: a survey," European Economic Review, Elsevier, vol. 51(5), pages 1059-1105, July.
    11. Polachek, Solomon W., 2008. "Earnings Over the Life Cycle: The Mincer Earnings Function and Its Applications," Foundations and Trends(R) in Microeconomics, now publishers, vol. 4(3), pages 165-272, April.
    12. Ge, Suqin, 2013. "Estimating the returns to schooling: Implications from a dynamic discrete choice model," Labour Economics, Elsevier, vol. 20(C), pages 92-105.
    13. Deniz Ozabaci & Daniel Henderson, 2015. "Additive kernel estimates of returns to schooling," Empirical Economics, Springer, vol. 48(1), pages 227-251, February.
    14. Gunnar Isacsson, 2004. "Estimating the economic return to educational levels using data on twins," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 99-119.
    15. Chaitali Sinha, 2014. "Human Capital and Public Policy," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(1), pages 79-125, June.
    16. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," Journal of Human Capital, University of Chicago Press, vol. 2(1), pages 1-31.
    17. Buscha, Franz & Dickson, Matt, 2015. "The Wage Returns to Education over the Life-Cycle: Heterogeneity and the Role of Experience," IZA Discussion Papers 9596, Institute of Labor Economics (IZA).
    18. NAKAMURO Makiko & INUI Tomohiko, 2012. "Estimating the Returns to Education Using a Sample of Twins - The case of Japan -," Discussion papers 12076, Research Institute of Economy, Trade and Industry (RIETI).
    19. Nikolov, Plamen & Jimi, Nusrat & Chang, Jerray, 2020. "The Importance of Cognitive Domains and the Returns to Schooling in South Africa: Evidence from Two Labor Surveys," Labour Economics, Elsevier, vol. 65(C).
    20. Ukaj MIC & Mustafa Topxhiu RAHMIJE, 2019. "The returns to investment in education: Some theoretical and empirical insights," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 1, pages 193-203.

    More about this item

    Keywords

    returns to schooling; life-cycle bias; lifetime earnings; current earnings; errors-in-variables model;
    All these keywords.

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp5788. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.