Life Cycle Earnings, Education Premiums and Internal Rates of Return

Manudeep Bhuller, Magne Mogstad and Kjell G Salvanes

No 8316, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: What do the education premiums look like over the life cycle? What is the impact of schooling on lifetime earnings? How does the internal rate of return compare with opportunity cost of funds? To what extent do progressive taxes attenuate the incentives to invest in education? This paper exploits Norwegian population panel data with nearly career long earnings histories to answer these important questions. We provide a detailed picture of the causal relationship between schooling and earnings over the life cycle, following individuals over their working lifespan. To account for endogeneity of schooling, we apply three commonly used identification strategies. Our estimates show that additional schooling gives higher lifetime earnings and steeper age-earnings profile, in line with predictions from human capital theory. These estimates imply an internal rate of return of around 10 percent, after taking into account income taxes and earnings-related pension entitlements. Under standard conditions, this finding suggests it was financially profitable to take additional schooling because the rates of return were substantially higher than the market interest rates. By comparison, Mincer regressions understate substantially the rates of return. We explore the reasons for this downward bias, finding that it is driven by Mincer's assumptions of no earnings while in school and exogenous post-schooling employment.

Keywords: life cycle earnings; internal rate of return; education premium (search for similar items in EconPapers)
JEL-codes: J24 J31 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2014-07
New Economics Papers: this item is included in nep-cse, nep-edu, nep-eur, nep-lab and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Forthcoming - published in: Journal of Labor Economics, 2017, 35 (4), 993-1030.

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Related works:
Journal Article: Life-Cycle Earnings, Education Premiums, and Internal Rates of Return (2017)
Working Paper: Life Cycle Earnings, Education Premiums and Internal Rates of Return (2014)
Working Paper: Life Cycle Earnings, Education Premiums and Internal Rates of Return (2014)
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