Estimates of the economic return to schooling for the UK

Colm Harmon and Ian Walker ()

No W95/12, IFS Working Papers from Institute for Fiscal Studies

Abstract: This paper estimates the impact of schooling on the wages of men. It is important to know what the return on educational investments might be since a high return implies that there might be too little of such investments. The major preoccupation in this literature has been attempting to unravel the simultaneous relationship between schooling and wages. That is, wages depend on schooling since schooling enhances human capital, but schooling decisions depend on wages for one or more of a number of reasons - for example, individuals will invest in more schooling the greater is the return to that schooling. Traditional estimates of the return to an additional year of schooling in the UK suggest that this is in of the order of 7%. However, the results here suggest much larger figures - perhaps in the order of 20%. We use a large sample of UK males to address the potential endogeneity of schooling. By exploiting the experimental nature of two changes in the minimum school leaving age to uncover the effect of an exogenous increase in schooling on wages. Our results confirm recent US work. For example, Card (1993) and Butcher and Case (1994) suggest that the estimates of schooling returns using such methods are almost double that of simple least squares methods. However, the results here provide much greater precision than has previously been the case and so substantiate the US evidence of much larger rates of return to education than traditionally thought.

Date: 1995-01-01
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