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Persistence Bias and Schooling Returns

Author Info

  • Andini, Corrado

    ()

    (University of Madeira)

Abstract

A well-established empirical literature suggests that individual wages are persistent. Several theoretical arguments support this empirical finding. Yet, the standard approach to the estimation of schooling returns does not account for this fact. This paper investigates the consequences of disregarding earnings persistence. In particular, it shows that the most commonly used static-model estimators of schooling coefficients are subject to an omitted-variable bias which can be named "persistence bias".

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 8143.

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Length: 34 pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:iza:izadps:dp8143
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Keywords: schooling; wages; dynamic panel-data models;

Find related papers by JEL classification:

  • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
  • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
  • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

This paper has been announced in the following NEP Reports:

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  1. Farber, Henry S, 1994. "The Analysis of Interfirm Worker Mobility," Journal of Labor Economics, University of Chicago Press, vol. 12(4), pages 554-93, October.
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  7. Badi H. Baltagi & Uwe Blien & Katja Wolf, 2008. "New Evidence on the Dynamic Wage Curve for Western Germany: 1980-2004," Center for Policy Research Working Papers 103, Center for Policy Research, Maxwell School, Syracuse University.
  8. Andini, Corrado, 2008. "Wage Bargaining and the (Dynamic) Mincer Equation," IZA Discussion Papers 3822, Institute for the Study of Labor (IZA).
  9. Andini, Corrado, 2013. "Earnings persistence and schooling returns," Economics Letters, Elsevier, vol. 118(3), pages 482-484.
  10. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April.
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  12. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March.
  13. Webbink, Dinand & Hartog, Joop, 2004. "Can students predict starting salaries? Yes!," Economics of Education Review, Elsevier, vol. 23(2), pages 103-113, April.
  14. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
  15. Anabela Carneiro & Paulo Guimarães & Pedro Portugal, 2012. "Real Wages and the Business Cycle: Accounting for Worker, Firm, and Job Title Heterogeneity," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 133-52, April.
  16. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
  17. David Card, 2000. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," NBER Working Papers 7769, National Bureau of Economic Research, Inc.
  18. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  19. Fatih Guvenen, 2007. "An empirical investigation of labor income processes," IFS Working Papers W07/13, Institute for Fiscal Studies.
  20. Schwarz, Claudia & Kripfganz, Sebastian, 2015. "Estimation of linear dynamic panel data models with time-invariant regressors," Working Paper Series 1838, European Central Bank.
  21. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  22. Ana Rute Cardoso & Miguel Portela, 2009. "Micro Foundations for Wage Flexibility: Wage Insurance at the Firm Level," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(1), pages 29-50, 03.
  23. 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.
  24. Corrado Andini, 2007. "Returns to education and wage equations: a dynamic approach," Applied Economics Letters, Taylor & Francis Journals, vol. 14(8), pages 577-579.
  25. Laura Hospido, 2007. "Modelling Heterogeneity And Dynamics In The Volatility Of Individual Wages," Working Papers wp2007_0717, CEMFI.
  26. Buchinsky, Moshe, 1994. "Changes in the U.S. Wage Structure 1963-1987: Application of Quantile Regression," Econometrica, Econometric Society, vol. 62(2), pages 405-58, March.
  27. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
  28. Guiso, Luigi & Pistaferri, Luigi & Schivardi, Fabiano, 2001. "Insurance Within the Firm," CEPR Discussion Papers 2793, C.E.P.R. Discussion Papers.
  29. Philip A. Trostel, 2005. "Nonlinearity in the return to education," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 191-202, May.
  30. Hungerford, Thomas & Solon, Gary, 1987. "Sheepskin Effects in the Returns to Education," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 175-77, February.
  31. Andini, Corrado, 2013. "Persistence Bias and the Wage-Schooling Model," IZA Discussion Papers 7186, Institute for the Study of Labor (IZA).
  32. 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.
  33. Anastasia Semykina & Jeffrey M. Wooldridge, 2013. "Estimation of dynamic panel data models with sample selection," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(1), pages 47-61, 01.
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Cited by:

  1. Rietveld, Cornelius A. & Webbink, Dinand, 2016. "On the genetic bias of the quarter of birth instrument," Economics & Human Biology, Elsevier, vol. 21(C), pages 137-146.

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