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The returns to schooling unveiled

Author

Listed:
  • Hugo Reis
  • Paulo Guimarães
  • Pedro Portugal
  • Ana Rute Cardoso

Abstract

We bring together the strands of literature on the returns to education, its spillovers, and the role of the employer shaping the wage distribution. The aim is to analyze the labor market returns to education taking into account who the worker is (worker unobserved ability), what he does (the job title), with whom (the coworkers) and, also crucially, for whom (the employer). We combine data of remarkable quality exhaustive longitudinal linked employer-employee data on Portugal with innovative empirical methods, to address the homophily or reflection problem, selection issues, and common measurement errors and confounding factors. Our methodology combines the estimation of wage regressions in the spirit of Abowd, Kramarz, and Margolis (1999), Gelbach's (2016) unambiguous conditional decomposition of the impact of various omitted covariates on an estimated coefficient, and Arcidiacono et al.'s (2012) procedure to identify the impact of peer quality. We first uncover that peer effects are quite sizeable. A one standard deviation increase in the measure of peer quality leads to a wage increase of 2.1 log points. Next, we show that education grants access to better-paying firms and job titles: one fourth of the overall return to education operates through the firm channel and a third operates through the job-title channel, while the remainder is associated exclusively with the individual worker. Finally, we unveil that an additional year of average education of coworkers yields a 0.5 log points increase in a worker's wage, after we net out a 2.0 log points return due to homophily (similarity of own and peers' characteristics), and 3.3 log points associated with worker sorting across firms and job titles.

Suggested Citation

  • Hugo Reis & Paulo Guimarães & Pedro Portugal & Ana Rute Cardoso, 2018. "The returns to schooling unveiled," Working Papers w201805, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201805
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    References listed on IDEAS

    as
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Returns to Schooling Unveiled
      by maximorossi in NEP-LTV blog on 2018-12-10 19:23:37

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    Cited by:

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    2. Pedro Portugal, 2020. "The sources of wage variability in Portugal: a binge reading survey," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    3. Sónia Cabral & Pedro S. Martins & João Pereira dos Santos & Mariana Tavares, 2021. "Collateral Damage? Labour Market Effects of Competing with China—at Home and Abroad," Economica, London School of Economics and Political Science, vol. 88(350), pages 570-600, April.
    4. Joop Hartog & Pedro S. Raposo & Hugo Reis, 2018. "Vocational High School Graduate Wage Gap: The Role of Cognitive Skills and Firms," CESifo Working Paper Series 7075, CESifo.
    5. Hartog, Joop & Raposo, Pedro, 2017. "Are starting wages reduced by an insurance premium for preventing wage decline? Testing the prediction of Harris and Holmstrom (1982)," Labour Economics, Elsevier, vol. 48(C), pages 105-119.
    6. Despagne, Colette & Manzano-Munguía, María Cristina, 2020. "Youth return migration (US-Mexico): Students’ citizenship in Mexican schools," Children and Youth Services Review, Elsevier, vol. 110(C).
    7. Niklas Engbom & Christian Moser, 2017. "Returns to Education through Access to Higher-Paying Firms: Evidence from US Matched Employer-Employee Data," American Economic Review, American Economic Association, vol. 107(5), pages 374-378, May.
    8. Gordanier, John & Ozturk, Orgul & Williams, Breyon & Zhan, Crystal, 2020. "Free Lunch for All! The Effect of the Community Eligibility Provision on Academic Outcomes," Economics of Education Review, Elsevier, vol. 77(C).
    9. Joop Hartog & Pedro S. Raposo & Hugo Reis, 2018. "Vocational High School Graduate Wage Gap: The Role of Cognitive Skills and Firms," CESifo Working Paper Series 7075, CESifo.
    10. Ettore Panetti & Edoardo M. Acabbi & Alessandro Sforza, 2019. "The Financial Channels of Labor Rigidities: Evidence from Portugal," Working Papers w201915, Banco de Portugal, Economics and Research Department.

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    More about this item

    JEL classification:

    • I20 - Health, Education, and Welfare - - Education - - - General
    • 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

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