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Using heteroscedasticity to estimate the returns to education

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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, 2003. "Using heteroscedasticity to estimate the returns to education," Working Papers 200301, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:200301
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    File URL: http://hdl.handle.net/10197/931
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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.
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    16. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
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    Cited by:

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    2. Cavallo, Eduardo & Eichengreen, Barry & Panizza, Ugo, 2016. "Can Countries Rely on Foreign Saving for Investment and Economic Development?," CEPR Discussion Papers 11451, C.E.P.R. Discussion Papers.
    3. John J. Hisnanick, 2003. "A Great Place to Start: The Role of Military Service on Human Capital Formation," LABOUR, CEIS, vol. 17(1), pages 25-45, March.
    4. Harmon, Colm & Hogan, Vincent & Walker, Ian, 2003. "Dispersion in the economic return to schooling," Labour Economics, Elsevier, vol. 10(2), pages 205-214, April.
    5. Rosso, Anna, 2019. "Emigrant selection and wages: The case of Poland," Labour Economics, Elsevier, vol. 60(C), pages 148-175.
    6. Courtemanche, Charles & Pinkston, Joshua C. & Stewart, Jay, 2021. "Time spent exercising and obesity: An application of Lewbel’s instrumental variables method," Economics & Human Biology, Elsevier, vol. 41(C).
    7. 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.
    8. repec:ucn:wpaper:10197/1101 is not listed on IDEAS
    9. Kajuth, Florian, 2012. "Identifying the Phillips curve through shifts in volatility," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 975-991.
    10. 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.
    11. 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.
    12. Yakovlev, Pavel & Leguizamon, Susane, 2012. "Ignorance is not bliss: On the role of education in subjective well-being," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(6), pages 806-815.
    13. Lee, Ha Yan & Ricci, Luca Antonio & Rigobon, Roberto, 2004. "Once again, is openness good for growth?," Journal of Development Economics, Elsevier, vol. 75(2), pages 451-472, December.
    14. Lídia Farré & Roger Klein & Francis Vella, 2013. "A parametric control function approach to estimating the returns to schooling in the absence of exclusion restrictions: an application to the NLSY," Empirical Economics, Springer, vol. 44(1), pages 111-133, February.
    15. International Monetary Fund, 2004. "Once Again, is Openness Good for Growth?," IMF Working Papers 2004/135, International Monetary Fund.
    16. Uwaifo, Ruth, 2006. "Africa's Education Enigma? The Nigerian story," 2006 Annual meeting, July 23-26, Long Beach, CA 21254, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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    More about this item

    Keywords

    Identification; Returns to education; Education--Economic aspects; Heteroscedasticity; Wages--Effect of education on;
    All these keywords.

    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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