IDEAS home Printed from https://ideas.repec.org/a/wly/japmet/v39y2024i1p3-21.html
   My bibliography  Save this article

The efficacy of ability proxies for estimating the returns to schooling: A factor model‐based evaluation

Author

Listed:
  • Mohitosh Kejriwal
  • Xiaoxiao Li
  • Linh Nguyen
  • Evan Totty

Abstract

A common approach to addressing ability bias is to augment the earnings‐schooling regression with proxies for cognitive and non‐cognitive skills. We evaluate this approach using a factor model framework, which allows consistent estimation of the returns to schooling without relying on proxies. The factor model estimators may be viewed as implicitly estimating proxy measurement error and/or accounting for omitted dimensions of ability. A bias decomposition quantifies the contribution of the proxies while the estimated latent skills are used to construct direct tests for their viability. Both sets of results confirm the inadequacy of the proxies in capturing the latent skills.

Suggested Citation

  • Mohitosh Kejriwal & Xiaoxiao Li & Linh Nguyen & Evan Totty, 2024. "The efficacy of ability proxies for estimating the returns to schooling: A factor model‐based evaluation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(1), pages 3-21, January.
    • Handle: RePEc:wly:japmet:v:39:y:2024:i:1:p:3-21
    DOI: 10.1002/jae.3011
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/jae.3011
    Download Restriction: no
    File URL: https://libkey.io/10.1002/jae.3011?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jeremy Lise & Fabien Postel-Vinay, 2020. "Multidimensional Skills, Sorting, and Human Capital Accumulation," American Economic Review, American Economic Association, vol. 110(8), pages 2328-2376, August.
    2. Joseph G. Altonji & Charles R. Pierret, 2001. "Employer Learning and Statistical Discrimination," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 313-350.
    3. Hansen, Karsten T. & Heckman, James J. & Mullen, K.J.Kathleen J., 2004. "The effect of schooling and ability on achievement test scores," Journal of Econometrics, Elsevier, vol. 121(1-2), pages 39-98.
    4. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    5. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
    6. Jonah B. Gelbach, 2016. "When Do Covariates Matter? And Which Ones, and How Much?," Journal of Labor Economics, University of Chicago Press, vol. 34(2), pages 509-543.
    7. James J. Heckman & John Eric Humphries & Gregory Veramendi, 2018. "Returns to Education: The Causal Effects of Education on Earnings, Health, and Smoking," Journal of Political Economy, University of Chicago Press, vol. 126(S1), pages 197-246.
    8. Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute of Labor Economics (IZA).
    9. Lin, Dajun & Lutter, Randall & Ruhm, Christopher J., 2018. "Cognitive performance and labour market outcomes," Labour Economics, Elsevier, vol. 51(C), pages 121-135.
    10. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "2001 Lawrence R. Klein Lecture Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 361-422, May.
    11. Lange, Fabian & Topel, Robert, 2006. "The Social Value of Education and Human Capital," Handbook of the Economics of Education, in: Erik Hanushek & F. Welch (ed.), Handbook of the Economics of Education, edition 1, volume 1, chapter 8, pages 459-509, Elsevier.
    12. Fatih Guvenen & Burhan Kuruscu & Satoshi Tanaka & David Wiczer, 2020. "Multidimensional Skill Mismatch," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(1), pages 210-244, January.
    13. Koop, Gary M & Tobias, Justin, 2004. "Learning About Heterogeneity in Returns to Schooling," Staff General Research Papers Archive 12008, Iowa State University, Department of Economics.
    14. James J. Heckman & Jora Stixrud & Sergio Urzua, 2006. "The Effects of Cognitive and Noncognitive Abilities on Labor Market Outcomes and Social Behavior," Journal of Labor Economics, University of Chicago Press, vol. 24(3), pages 411-482, July.
    15. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
    16. Evan Totty, 2017. "The Effect Of Minimum Wages On Employment: A Factor Model Approach," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1712-1737, October.
    17. Westerlund, Joakim & Petrova, Yana, 2018. "Asymptotic collinearity in CCE estimation of interactive effects models," Economic Modelling, Elsevier, vol. 70(C), pages 331-337.
    18. Mohitosh Kejriwal & Xiaoxiao Li & Evan Totty, 2020. "Multidimensional skills and the returns to schooling: Evidence from an interactive fixed‐effects approach and a linked survey‐administrative data set," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(5), pages 548-566, August.
    19. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    20. Bai, Jushan & Ng, Serena, 2006. "Evaluating latent and observed factors in macroeconomics and finance," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 507-537.
    21. Jared Ashworth & V. Joseph Hotz & Arnaud Maurel & Tyler Ransom, 2021. "Changes across Cohorts in Wage Returns to Schooling and Early Work Experiences," Journal of Labor Economics, University of Chicago Press, vol. 39(4), pages 931-964.
    22. Heckman, James J. & Lochner, Lance J. & Todd, Petra E., 2006. "Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond," Handbook of the Economics of Education, in: Erik Hanushek & F. Welch (ed.), Handbook of the Economics of Education, edition 1, volume 1, chapter 7, pages 307-458, Elsevier.
    23. Flavio Cunha & Fatih Karahan & Ilton Soares, 2011. "Returns to Skills and the College Premium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 39-86, August.
    24. Jushan Bai, 2009. "Panel Data Models With Interactive Fixed Effects," Econometrica, Econometric Society, vol. 77(4), pages 1229-1279, July.
    25. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-1160, September.
    26. Onatski, Alexei, 2012. "Asymptotics of the principal components estimator of large factor models with weakly influential factors," Journal of Econometrics, Elsevier, vol. 168(2), pages 244-258.
    27. Dukpa Kim & Tatsushi Oka, 2014. "Divorce Law Reforms And Divorce Rates In The Usa: An Interactive Fixed‐Effects Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(2), pages 231-245, March.
    28. Donna K. Ginther, 2000. "Alternative Estimates of the Effect of Schooling on Earnings," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 103-116, February.
    29. Benjamin Williams, 2019. "Controlling for ability using test scores," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(4), pages 547-565, June.
    30. Flavio Cunha & Fatih Karahan & Ilton Soares, 2011. "Returns to Skills and the College Premium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s1), pages 39-86, August.
    31. Hungerford, Thomas & Solon, Gary, 1987. "Sheepskin Effects in the Returns to Education," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 175-177, February.
    32. De Vos, Ignace & Westerlund, Joakim, 2019. "On CCE estimation of factor-augmented models when regressors are not linear in the factors," Economics Letters, Elsevier, vol. 178(C), pages 5-7.
    33. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
    34. Westerlund, Joakim & Urbain, Jean-Pierre, 2013. "On the estimation and inference in factor-augmented panel regressions with correlated loadings," Economics Letters, Elsevier, vol. 119(3), pages 247-250.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mohitosh Kejriwal & Xiaoxiao Li & Evan Totty, 2020. "Multidimensional skills and the returns to schooling: Evidence from an interactive fixed‐effects approach and a linked survey‐administrative data set," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(5), pages 548-566, August.
    2. Mohitosh Kejriwal & Xiaoxiao Li & Evan Totty, 2019. "Multidemsional Skills and Returns to Schooling: Evidence from an Interactive Fixed Effects Aproach and a Linked Survey-Administrative Dataset," Purdue University Economics Working Papers 1316, Purdue University, Department of Economics.
    3. Laurent Gobillon & Thierry Magnac, 2016. "Regional Policy Evaluation: Interactive Fixed Effects and Synthetic Controls," The Review of Economics and Statistics, MIT Press, vol. 98(3), pages 535-551, July.
    4. Jorge Rodríguez & Fernando Saltiel & Sergio Urzúa, 2022. "Dynamic treatment effects of job training," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(2), pages 242-269, March.
    5. Sarafidis, Vasilis & Yamagata, Takashi, 2010. "Instrumental Variable Estimation of Dynamic Linear Panel Data Models with Defactored Regressors under Cross-sectional Dependence," MPRA Paper 25182, University Library of Munich, Germany.
    6. Freeman, Hugo & Weidner, Martin, 2023. "Linear panel regressions with two-way unobserved heterogeneity," Journal of Econometrics, Elsevier, vol. 237(1).
    7. Callaway, Brantly & Karami, Sonia, 2023. "Treatment effects in interactive fixed effects models with a small number of time periods," Journal of Econometrics, Elsevier, vol. 233(1), pages 184-208.
    8. Milda Norkuté & Vasilis Sarafidis & Takashi Yamagata, 2018. "Instrumental Variable Estimation of Dynamic Linear Panel Data Models with Defactored Regressors and a Multifactor Error Structure," ISER Discussion Paper 1019, Institute of Social and Economic Research, Osaka University.
    9. repec:hal:pseose:halshs-00849071 is not listed on IDEAS
    10. Bonhomme, Stphane & Robin, Jean-Marc, 2009. "Consistent noisy independent component analysis," Journal of Econometrics, Elsevier, vol. 149(1), pages 12-25, April.
    11. Norkutė, Milda & Sarafidis, Vasilis & Yamagata, Takashi & Cui, Guowei, 2021. "Instrumental variable estimation of dynamic linear panel data models with defactored regressors and a multifactor error structure," Journal of Econometrics, Elsevier, vol. 220(2), pages 416-446.
    12. Hugo Freeman & Martin Weidner, 2021. "Linear Panel Regressions with Two-Way Unobserved Heterogeneity," Papers 2109.11911, arXiv.org, revised Aug 2022.
    13. Hugo Freeman & Martin Weidner, 2021. "Linear panel regressions with two-way unobserved heterogeneity," CeMMAP working papers CWP39/21, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    14. Kemptner, Daniel & Tolan, Songül, 2018. "The role of time preferences in educational decision making," Economics of Education Review, Elsevier, vol. 67(C), pages 25-39.
    15. Pablo Lavado & Nelson Oviedo & Hernán Ruffo, 2016. "Destruction of Cognitive and Noncognitive Skills in Adulthood," Working Papers 16-07, Centro de Investigación, Universidad del Pacífico.
    16. De Vos, Ignace & Stauskas, Ovidijus, 2024. "Cross-section bootstrap for CCE regressions," Journal of Econometrics, Elsevier, vol. 240(1).
    17. Shakeeb Khan & Arnaud Maurel & Yichong Zhang, 2023. "Informational Content of Factor Structures in Simultaneous Binary Response Models," Advances in Econometrics, in: Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications, volume 45, pages 385-410, Emerald Group Publishing Limited.
    18. Bai, Jushan & Liao, Yuan, 2017. "Inferences in panel data with interactive effects using large covariance matrices," Journal of Econometrics, Elsevier, vol. 200(1), pages 59-78.
    19. Castagnetti, Carolina & Rossi, Eduardo & Trapani, Lorenzo, 2019. "A two-stage estimator for heterogeneous panel models with common factors," Econometrics and Statistics, Elsevier, vol. 11(C), pages 63-82.
    20. Heckman, James J. & Navarro, Salvador, 2007. "Dynamic discrete choice and dynamic treatment effects," Journal of Econometrics, Elsevier, vol. 136(2), pages 341-396, February.
    21. Rémi Piatek & Pia Pinger, 2016. "Maintaining (Locus of) Control? Data Combination for the Identification and Inference of Factor Structure Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(4), pages 734-755, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:japmet:v:39:y:2024:i:1:p:3-21. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0883-7252/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.