IDEAS home Printed from https://ideas.repec.org/p/pri/indrel/415.html
   My bibliography  Save this paper

Interpreting Instrumental Variables Estimates of the Returns to Schooling

Author

Listed:
  • Jeffrey R. Kling

    (Princeton University and NBER)

Abstract

An instrumental variable can be used to identify the labor market return to schooling by allowing comparisons between groups of individuals whose differences in schooling levels are uncorrelated with their underlying marginal benefit from schooling and with other aspects of unobserved ability. When the education decisions are based on individual-specific marginal benefits and costs, there is no single rate of return for everyone in the population. This paper demonstrates economic insights from methods interpreting instrumental variables estimates as weighted averages of individual-specific causal effects of schooling on wages by synthesizing existing theoretical and econometric work, and by using geographic variation in college proximity as an example of an instrumental variable. Characterizing the groups affected by the college proximity instrument, I find the largest increase in schooling levels among individuals from more disadvantaged backgrounds. Although the data is insufficient to obtain useful estimates of group-specific rates of return, I directly compute the weight each group receives in the overall estimate. In analyzing the response function and showing the level of schooling at which individuals change their behavior in response to the instrument, I demonstrate that the instrument has the greatest impact on the transition from high school to college. This corresponds to the economic intuition that changes in the marginal cost of college should be concentrated at this transition and should not affect all levels of schooling equally. The results suggest that disadvantaged groups are most responsive to policies lowering college costs, and that increases in education for these groups may have high payoff.

Suggested Citation

  • Jeffrey R. Kling, 1999. "Interpreting Instrumental Variables Estimates of the Returns to Schooling," Working Papers 794, Princeton University, Department of Economics, Industrial Relations Section..
  • Handle: RePEc:pri:indrel:415
    as

    Download full text from publisher

    File URL: http://dataspace.princeton.edu/jspui/handle/88435/dsp01xd07gs69b
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. David Card, 1994. "Earnings, Schooling, and Ability Revisited," Working Papers 710, Princeton University, Department of Economics, Industrial Relations Section..
    2. 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.
    3. Caroline M. Hoxby, 1997. "How the Changing Market Structure of U.S. Higher Education Explains College Tuition," NBER Working Papers 6323, National Bureau of Economic Research, Inc.
    4. Meyer, Bruce D, 1995. "Natural and Quasi-experiments in Economics," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(2), pages 151-161, April.
    5. 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.
    6. Joshua D. Angrist & Alan B. Keueger, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 979-1014.
    7. Joshua D. Angrist, 1998. "Estimating the Labor Market Impact of Voluntary Military Service Using Social Security Data on Military Applicants," Econometrica, Econometric Society, vol. 66(2), pages 249-288, March.
    8. Wooldridge, Jeffrey M., 1997. "On two stage least squares estimation of the average treatment effect in a random coefficient model," Economics Letters, Elsevier, vol. 56(2), pages 129-133, October.
    9. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
    10. J.D. Angrist & Guido W. Imbens & D.B. Rubin, 1993. "Identification of Causal Effects Using Instrumental Variables," NBER Technical Working Papers 0136, National Bureau of Economic Research, Inc.
    11. Stephen Cameron & Christopher Taber, 2000. "Borrowing Constraints and the Returns to Schooling," NBER Working Papers 7761, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    returns to education; estimation of causal effects;

    JEL classification:

    • N67 - Economic History - - Manufacturing and Construction - - - Africa; Oceania

    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:pri:indrel:415. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bobray Bordelon). General contact details of provider: http://edirc.repec.org/data/irprius.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.