Unobserved Ability, Comparative Advantage, and the Rising Return to Education in the United States 1979-2002

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 06.04.2004, 12:15 - 13:30


Presentation by 

Olivier Deschenes (University of California, Santa Barbara)


This paper quantifies the change in the causal effect of education on labor market earnings in the United States between 1979 and 2002. In absence of valid instrumental variables for schooling, I develop a causal model for earnings and schooling that incorporates heterogeneity in absolute and comparative advantage across individuals. The model is used to impose some structure on the observed relationship between schooling and earnings. A simple intuition arises from the model: if individuals with higher returns to schooling acquire more schooling, the relationship between log earnings and schooling will be convex. Likewise, for a fixed cohort of individuals, the degree of convexity will rise over time if the causal return to education rises. Differences across cohorts in the mapping between schooling and ability will lead to permanent differences in the profiles of the earnings-schooling relationship. Changes in the observed relationship between schooling and earnings can therefore be decomposed into year-specific and cohort-specific effects corresponding to causal and confounding components. Using CPS data for cohorts of men born between 1930 and 1970, I find that the causal return to education increased by 20-40% between 1979 and 2002, after controlling for the confounding effects of time-varying ability and comparative advantage biases across cohorts. This increases explains most of the observed change in the educational wage structure in the U.S. over that time period.

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