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Using heteroscedasticity to estimate the returns to education

Author

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  • Vincent (Vincent Peter) Hogan
  • Roberto Rigobon

Abstract

We apply a new estimator to the measurement of the economic returns to education. We control for endogenous education, unobserved ability and measurement error using only the natural heteroscedasticty of wages and education attainment. Our prefered estimate, 6.07%, is closer to the OLS estimate but smaller (and more precise) than the estimates typically reported by studies that use IV. Our results indicate that the biases generated by unobserved ability and measurement error tend to cancel each other out as suggested by Griliches (1977). We also present Monte Carlo evidence to show that the finite sample bias our estimator is small.

Suggested Citation

  • Vincent (Vincent Peter) Hogan & Roberto Rigobon, 2002. "Using heteroscedasticity to estimate the returns to education," Open Access publications 10197/1100, School of Economics, University College Dublin.
  • Handle: RePEc:ucn:oapubs:10197/1100
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    File URL: http://hdl.handle.net/10197/1100
    File Function: First version, 2002
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    References listed on IDEAS

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    1. Esther Duflo, 2001. "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment," American Economic Review, American Economic Association, vol. 91(4), pages 795-813, September.
    2. Colm Harmon; & Ian Walker, 1995. "Estimates of Economic Return to Schooling in the UK," Economics, Finance and Accounting Department Working Paper Series n540195, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    3. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters,in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
    4. Harmon, Colm & Walker, Ian, 1995. "Estimates of the Economic Return to Schooling for the United Kingdom," American Economic Review, American Economic Association, vol. 85(5), pages 1278-1286, December.
    5. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, October.
    6. Charles F. Manski & John V. Pepper, 2000. "Monotone Instrumental Variables, with an Application to the Returns to Schooling," Econometrica, Econometric Society, vol. 68(4), pages 997-1012, July.
    7. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, vol. 102(2), pages 143-164, June.
    8. Roberto Rigobon, 2000. "Identification through Heteroskedasticity: Measuring "Contagion: betweenArgentinean and Mexican Sovereign Bonds," NBER Working Papers 7493, National Bureau of Economic Research, Inc.
    9. Harmon, Harmon & Ian Walker, 1995. "Estimates of the economic return to schooling for the UK," IFS Working Papers W95/12, Institute for Fiscal Studies.
    10. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-1160, September.
    11. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-933, July.
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    Cited by:

    1. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2003. "Dispersion in the economic return to schooling," Labour Economics, Elsevier, vol. 10(2), pages 205-214, April.
    2. Alan Fernihough, 2017. "Human capital and the quantity–quality trade-off during the demographic transition," Journal of Economic Growth, Springer, vol. 22(1), pages 35-65, March.
    3. Daniel J. Henderson & Andrew Houtenville & Le Wang, 2017. "The Distribution of Returns to Education for People with Disabilities," Journal of Labor Research, Springer, vol. 38(3), pages 261-282, September.
    4. Anna Rosso, 2018. "Emigrant Selection and Wages: the Case of Poland," Development Working Papers 440, Centro Studi Luca d'Agliano, University of Milano, revised 08 Apr 2019.
    5. Vani Borooah & John Mangan, 2008. "Education, occupational class, and unemployment in the regions of the United Kingdom," Education Economics, Taylor & Francis Journals, vol. 16(4), pages 351-370.
    6. repec:ucn:wpaper:10197/1101 is not listed on IDEAS

    More about this item

    Keywords

    Identification; Returns to Education; Education--Economic aspects; Heteroscedasticity; Wages--Effect of education on;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • I20 - Health, Education, and Welfare - - Education - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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