Persistence Bias and the Wage-Schooling Model
This paper provides an expression for the bias of the OLS estimator of the schooling coefficient in a simple static wage-schooling model where earnings persistence is not accounted for. It is argued that the OLS estimator of the schooling coefficient is biased upward, and the bias is increasing with potential labor-market experience and the degree of earnings persistence. In addition, NLSY data are used to show that the magnitude of the persistence bias is non-negligible, and the bias cannot be cured by increasing the control set. Further, it is shown that disregarding earnings persistence is still problematic for the estimation of the schooling coefficient even if individual unobserved heterogeneity and endogeneity are taken into account. Overall, the findings support the dynamic approach to the estimation of wage-schooling models recently suggested by Andini (2012; 2013).
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References listed on IDEAS
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- Richard Blundell & Stephen Bond, 2000.
"GMM Estimation with persistent panel data: an application to production functions,"
Taylor & Francis Journals, vol. 19(3), pages 321-340.
- Richard Blundell & Steve Bond, 1999. "GMM estimation with persistent panel data: an application to production functions," IFS Working Papers W99/04, Institute for Fiscal Studies.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- R Blundell & Steven Bond, "undated". "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- Francis Vella & Marno Verbeek, 1998. "Whose wages do unions raise? A dynamic model of unionism and wage rate determination for young men," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(2), pages 163-183.
- Corrado Andini, 2007. "Returns to education and wage equations: a dynamic approach," Applied Economics Letters, Taylor & Francis Journals, vol. 14(8), pages 577-579.
- Corrado Andini, 2013. "How well does a dynamic Mincer equation fit NLSY data? Evidence based on a simple wage-bargaining model," Empirical Economics, Springer, vol. 44(3), pages 1519-1543, June.
- Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-1160, September.
- David Card, 2000. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," NBER Working Papers 7769, National Bureau of Economic Research, Inc.
- Andini, Corrado, 2013. "Earnings persistence and schooling returns," Economics Letters, Elsevier, vol. 118(3), pages 482-484. Full references (including those not matched with items on IDEAS)
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