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Life-cycle bias and the returns to schooling in current and lifetime earnings

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.

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Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 666.

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Date of creation: Oct 2011
Date of revision:
Handle: RePEc:ssb:dispap:666
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  1. Devereux, Paul J. & Fan, Wen, 2011. "Earnings returns to the British education expansion," Economics of Education Review, Elsevier, vol. 30(6), pages 1153-1166.
  2. 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.
  3. 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 555-76, December.
  4. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20082, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  5. 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 1157-73, December.
  6. Thomas Lemieux, 2008. "The changing nature of wage inequality," Journal of Population Economics, Springer, vol. 21(1), pages 21-48, January.
  7. Robert J. Willis & Sherwin Rosen, 1978. "Education and Self-Selection," NBER Working Papers 0249, National Bureau of Economic Research, Inc.
  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. Nybom, Martin & Stuhler, Jan, 2011. "Heterogeneous Income Profiles and Life-Cycle Bias in Intergenerational Mobility Estimation," IZA Discussion Papers 5697, Institute for the Study of Labor (IZA).
  10. Sandra E. Black & Paul Devereux & Kjell Salvanes, 2004. "Why the apple doesn't fall far: understanding intergenerational transmission of human capital," Working Paper Series 2004-12, Federal Reserve Bank of San Francisco.
  11. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
  12. 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, 03.
  13. repec:zbw:rwirep:0095 is not listed on IDEAS
  14. 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).
  15. 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 S37-64, October.
  16. David Card, 2000. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," NBER Working Papers 7769, National Bureau of Economic Research, Inc.
  17. 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.
  18. Colm Harmon & Hessel Oosterbeek & Ian Walker, 2003. "The Returns to Education: Microeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 17(2), pages 115-156, 04.
  19. 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.
  20. Cowell, Frank, 2011. "Measuring Inequality," OUP Catalogue, Oxford University Press, edition 3, number 9780199594047, July.
  21. Jacob Mincer, 1958. "Investment in Human Capital and Personal Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 66, pages 281.
  22. 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.
  23. 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.
  24. 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.
  25. 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.
  26. 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.
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