The Causal Effect of Education on Wages Revisited

Matt Dickson

No 4419, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper estimates the return to education using two alternative instrumental variable estimators: one exploits variation in schooling associated with early smoking behaviour, the other uses the raising of the minimum school leaving age. Each instrument estimates a 'local average treatment effect' and my motivation is to analyse the extent to which these differ and which is more appropriate for drawing conclusions about the return to education in Britain. I implement each instrument on the same data from the British Household Panel Survey, and use the over-identification to test the validity of my instruments. I find that the instrument constructed using early smoking behaviour is valid as well as being strong, and argue that it provides a better estimate of the average effect of additional education, akin to ordinary least squares but corrected for endogeneity. I also exploit the dual sources of exogenous variation in schooling to derive a further IV estimate of the return to schooling. I find the OLS estimate to be considerably downward biased (around 4.6%) compared with the IV estimates of 12.9% (early smoking), 10.2% (RoSLA) and 12.5% (both instruments).

Keywords: local average treatment effect; human capital; endogeneity (search for similar items in EconPapers)
JEL-codes: I20 J30 (search for similar items in EconPapers)
Pages: 87 pages
Date: 2009-09
New Economics Papers: this item is included in nep-edu, nep-hrm and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published - revised version published in: Oxford Bulletin of Economics and Statistics, 2013, 75 (4), 477–498

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Related works:
Journal Article: The Causal Effect of Education on Wages Revisited (2013)
Working Paper: The Causal Effect of Education on Wages Revisited (2009)
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