Revisiting the Returns to Higher Education: Heterogeneity by Cognitive and Non-Cognitive Abilities

Recent work has highlighted the significant variation in returns to higher education across individuals. We develop a novel methodology-exploiting recent advances in the identification of mixture models-which groups individuals according to their prior ability and estimates the wage returns to a university degree by group. We prove the non-parametric identification of our model. Applying our method to data from a UK cohort study, our findings reflect recent evidence that skills and ability are multidimensional. Our flexible model allows the returns to university to vary across the (multi-dimensional) ability distribution, a flexibility missing from commonly used additive models, but which we show is empirically important. The returns to higher education are 3-4 times larger than the returns to prior cognitive and non-cognitive abilities. Returns are generally increasing in ability for both men and women, but vary non-monotonically across the ability distribution.