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Estimating the returns to schooling: Implications from a dynamic discrete choice model

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  • Ge, Suqin

Abstract

This paper assesses the applicability of a dynamic discrete choice model in accounting for the observed ordinary least squares (OLS) and instrumental variable (IV) estimates of the Mincer equation parameter on returns to schooling. A dynamic model of schooling and employment choices is estimated and used to simulate educational attainment, employment history, and wages. Estimations of the Mincer wage equation using simulated data appear to validate the model. Ability selection is found to be the major source of bias in the OLS estimates of schooling returns. Although the IV estimates lie within the support of true returns to schooling if a strong and strictly exogenous instrument is used and if dynamic employment selection is controlled, these conditions may be easily violated in practice.

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  • Ge, Suqin, 2013. "Estimating the returns to schooling: Implications from a dynamic discrete choice model," Labour Economics, Elsevier, vol. 20(C), pages 92-105.
    • Handle: RePEc:eee:labeco:v:20:y:2013:i:c:p:92-105
    DOI: 10.1016/j.labeco.2012.11.004
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    More about this item

    Keywords

    Returns to schooling; Instrumental variable (IV); Ordinary least squares (OLS); Dynamic discrete choice model;
    All these keywords.

    JEL classification:

    • I2 - Health, Education, and Welfare - - Education
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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