Estimating returns to education using different natural experiment techniques

Andrew Leigh*, Chris Ryan

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    45 Citations (Scopus)

    Abstract

    How much do returns to education differ across different natural experiment methods? To test this, we estimate the rate of return to schooling in Australia using two different instruments for schooling: month of birth and changes in compulsory schooling laws. With annual pre-tax income as our measure of income, we find that the naïve ordinary least squares (OLS) returns to an additional year of schooling is 13%. The month of birth IV approach gives an 8% rate of return to schooling, while using changes in compulsory schooling laws as an IV produces a 12% rate of return. We then compare our results with a third natural experiment: studies of Australian twins that have been conducted by other researchers. While these studies have tended to estimate a lower return to education than ours, we believe that this is primarily due to the better measurement of income and schooling in our data set. Australian twins studies are consistent with our findings insofar as they find little evidence of ability bias in the OLS rate of return to schooling. Together, the estimates suggest that between one-tenth and two-fifths of the OLS return to schooling is due to ability bias. The rate of return to education in Australia, corrected for ability bias, is around 10%, which is similar to the rate in Britain, Canada, the Netherlands, Norway and the United States.

    Original languageEnglish
    Pages (from-to)149-160
    Number of pages12
    JournalEconomics of Education Review
    Volume27
    Issue number2
    DOIs
    Publication statusPublished - Apr 2008

    Fingerprint

    Dive into the research topics of 'Estimating returns to education using different natural experiment techniques'. Together they form a unique fingerprint.

    Cite this