Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems

This paper reviews a set of recent studies that have attempted to measure the causal effect of education on labor market earnings by using institutional features of the supply side of the education system as exogenous determinants of schooling outcomes. A simple theoretical model that highlights the role of comparative advantage in the optimal schooling decision is presented and used to motivate an extended discussion of econometric issues, including the properties of ordinary least squares and instrumental variables estimators. A review of studies that have used compulsory schooling laws, differences in the accessibility of schools, and similar features as instrumental variables for completed education, reveals that the resulting estimates of the return to schooling are typically as big or bigger than the corresponding ordinary least squares estimates. One interpretation of this finding is that marginal returns to education among the low‐education subgroups typically affected by supply‐side innovations tend to be relatively high, reflecting their high marginal costs of schooling, rather than low ability that limits their return to education.     

How Responsive Is Investment in Schooling to Changes in Redistributive Policies and in Returns?

This paper uses an unusual pay reform to test the responsiveness of investment in schooling to changes in redistribution schemes that increase the rate of return to education. We exploit an episode where different Israeli kibbutzim shifted from equal sharing to productivity‐based wages in different years and find that students in kibbutzim that reformed earlier invested more in high school education and, in the long run, also in post‐secondary schooling. We further show that the effect is mainly driven by students in kibbutzim that reformed to a larger degree. Our findings support the prediction that education is highly responsive to changes in the redistribution policy.     

Returns to Schooling in Spain: How Reliable are Instrumental Variable Estimates?

This paper studies the ordinary least–squares (OLS) and instrumental variable (IV) estimates of the returns to schooling for male workers in Spain. OLS estimates are often biased due to the endogeneity of schooling, measurement errors or omitted variables. Proper IV estimates correct this bias. The reliability of family background, natural experiments (based on changes in the education system and season of birth) and the availability of a college in the province is checked using Spanish data. The results suggest that background and college availability are valid instruments and that the IV estimates of the returns to schooling are higher than OLS estimates. These results are in line with the majority of previous results in the literature.     

MATERNAL EDUCATION,HOME ENVIRONMENTS,AND THE DEVELOPMENT OF CHILDREN AND ADOLESCENTS

We study the intergenerational effects of maternal education on children’s cognitive achievement, behavioral problems, grade repetition, and obesity, using matched data from the female participants of the National Longitudinal Survey of Youth 1979 (NLSY79) and their children. We address the endogeneity of maternal schooling by instrumenting it with variation in schooling costs during the mother’s adolescence. Our results show substantial intergenerational returns to education. Our data set allows us to study a large array of channels which may transmit the effect of maternal education to the child, including family environment and parental investments at different ages of the child. We discuss policy implications and relate our findings to the literature on intergenerational mobility.     

THE PRIVATE AND FISCAL RETURNS TO SCHOOLING IN THE EUROPEAN UNION

We present estimates of the private and fiscal returns to schooling in 14 European Union countries. Estimates of the private returns to post‐compulsory formal education take into account the effects of schooling on wages and employment probabilities and allow for academic failure rates, the direct and opportunity costs of education, and the impact of personal taxes, social security contributions, and unemployment and pension benefits on lifetime earnings. Estimates of fiscal returns capture the long‐term effects of a marginal increase in average educational attainment on public finances under conditions that approximate general equilibrium. (JEL: I20, J31, H60).     

Evaluating Marginal Policy Changes and the Average Effect of Treatment for Individuals at the Margin

This paper develops methods for evaluating marginal policy changes. We characterize how the effects of marginal policy changes depend on the direction of the policy change, and show that marginal policy effects are fundamentally easier to identify and to estimate than conventional treatment parameters. We develop the connection between marginal policy effects and the average effect of treatment for persons on the margin of indifference between participation in treatment and nonparticipation, and use this connection to analyze both parameters. We apply our analysis to estimate the effect of marginal changes in tuition on the return to going to college.     

The Effects of the Specialist Schools Education Policy on School and Post‐School Outcomes in England

We investigate the effects of the specialist schools policy, introduced in 1994 in England, on test scores and truancy for pupils during compulsory schooling. We also assess the effects on labour market status and post‐secondary test score performance. We use matching models and data from the Youth Cohort Surveys for pupils who left school in either 2002 or 2004. We find that the policy did raise test scores, as well as increase the probability of employment. The evidence on post‐secondary test scores is mixed insofar as the policy increased the number of A levels studied but reduced average points scores.     

The Maximally Exposed Individual—Comparison of Maximum Likelihood Estimation of High Quantiles to an Extreme Value Estimate

The dose to human and nonhuman individuals inflicted by anthropogenic radiation is an important issue in international and domestic policy. The current paradigm for nonhuman populations asserts that if the dose to the maximally exposed individuals in a population is below a certain criterion (e.g., <10 mGy d(-1)) then the population is adequately protected. Currently, there is no consensus in the regulatory community as to the best statistical approach. Statistics, currently considered, include the maximum likelihood estimator for the 95th percentile of the sample mean and the sample maximum. Recently, the investigators have proposed the use of the maximum likelihood estimate of a very high quantile as an estimate of dose to the maximally exposed individual. In this study, we compare all of the above-mentioned statistics to an estimate based on extreme value theory. To determine and compare the bias and variance of these statistics, we use Monte Carlo simulation techniques, in a procedure similar to a parametric bootstrap. Our results show that a statistic based on extreme value theory has the least bias of those considered here, but requires reliable estimates of the population size. We recommend establishing the criterion based on what would be considered acceptable if only a small percentage of the population exceeded the limit, and hence recommend using the maximum likelihood estimator of a high quantile in the case that reliable estimates of the population size are not available.     

THE EFFECT OF CENTRAL EXIT EXAMINATIONS ON STUDENT ACHIEVEMENT: QUASI‐EXPERIMENTAL EVIDENCE FROM TIMSS GERMANY

This paper makes use of the regional variation in schooling legislation within the German secondary education system to estimate the causal effect of central exit examinations on student performance. We propose a difference‐in‐differences framework that exploits the quasi‐experimental nature of the German TIMSS middle school sample and discuss its identifying assumptions. The estimates show that students in federal states with central exit examinations clearly outperform students in federal states without such examinations. However, only part of this difference can be attributed to the existence of the central exit examinations themselves. Our results suggest that central examinations increase student achievement by the equivalent of about one‐third of a school year. (JEL: D02, H42, I28)     

EXPANSIONARY AUSTERITY? INTERNATIONAL EVIDENCE

This paper investigates the short‐term effects of fiscal consolidation on economic activity in OECD economies. We examine contemporaneous policy documents to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest that fiscal consolidation has contractionary effects on private demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.     

Uncertainty and Variation in Indirect Exposure Assessments: An Analysis of Exposure to Tetrachlorodibenzo-p-Dioxin from a Beef Consumption Pathway

Indirect exposures to 2,3,7,8-tetrachlorodibenzo- p -dioxin (TCDD) and other toxic materials released in incinerator emissions have been identified as a significant concern for human health. As a result, regulatory agencies and researchers have developed specific approaches for evaluating exposures from indirect pathways. This paper presents a quantitative assessment of the effect of uncertainty and variation in exposure parameters on the resulting estimates of TCDD dose rates received by individuals indirectly exposed to incinerator emissions through the consumption of home-grown beef. The assessment uses a nested Monte Carlo model that separately characterizes uncertainty and variation in dose rate estimates. Uncertainty resulting from limited data on the fate and transport of TCDD are evaluated, and variations in estimated dose rates in the exposed population that result from location-specific parameters and individuals'behaviors are characterized. The analysis indicates that lifetime average daily dose rates for individuals living within 10 km of a hypothetical incinerator range over three orders of magnitude. In contrast, the uncertainty in the dose rate distribution appears to vary by less than one order of magnitude, based on the sources of uncertainty included in this analysis. Current guidance for predicting exposures from indirect exposure pathways was found to overestimate the intakes for typical and high-end individuals.     

A New Look at the Public Wage Premium in Italy: The Role of Schooling Endogeneity

This paper uses a sample of male workers to estimate public and private wage structures and the public wage premium for Italy. Results from a model with endogenous sector and schooling suggest that public employees have on average lower unobserved wage potentials in both sectors than private employees, but work in the sector where they benefit from a comparative wage advantage. Schooling is positively correlated with wages in both sectors, and controlling for that is crucial to get more reliable estimates and predictions. The associated average unconditional public wage premium is 12 per cent. The net premium is 9 per cent, but not statistically significant.     

The Cohort Size‐Wage Relationship in Europe

This paper estimates the impact of cohort size on wages using data on young males in European regions covering 2004–10. The effect of cohort size on wages is identified through an instrumental variables strategy which, in contrast to previous analyses of European data, addresses self‐selection into geographical areas as well as into educational groups. The results suggest that cohort size has a significant negative effect on male wages for individuals with secondary education — the largest group — but not for individuals with less than secondary education or tertiary education. This effect is underestimated if self‐selection into geographical areas is not addressed.     

Skill Acquisition in the Informal Economy and Schooling Decisions: Evidence from Emerging Economies

Informal jobs offer skill acquisition opportunities that may facilitate a future switch to formal employment for young workers. In this sense, informal training on the job may be a viable alternative to formal schooling in an economy with a large and diverse informal sector. In this paper, I investigate if these considerations are relevant for the schooling decisions of young individuals using panel data for 17 Latin American countries and micro‐level data for Turkey. Specifically, I ask if the prevalence of informal jobs distorts schooling attainment. I concentrate on three measures of schooling outcomes: (1) secondary education enrollment rate; (2) out‐of‐school rate for lower secondary school; and (3) tertiary education graduation rate. I find that the secondary education enrollment rate is negatively correlated with the size of the informal economy, whereas the out‐of‐school rate is positively correlated. Moreover, the tertiary education graduation rates tend to fall as the informal employment opportunities increase. This means that informal training on the job may be crowding out school education in developing countries. Policies that can potentially affect the size of the informal sector should take into consideration these second‐round effects on aggregate schooling outcomes.     

Grenzen und Erweiterungsmöglichkeiten der investitionsneutralen Besteuerung nach dem ökonomischen Gewinn

We analyse the the concept of economic income taxation with regard to investment neutrality and the ability to pay principle. We build a bridge between the sum of economic incomes, net present value and the sum of total cash flows. Further it is shown, that the use of economic income for the evaluation of tax systems is distorted by two effects, the interest effect and a so called time-window effect. As to mitigate these effects we propose to include the net present value in the tax base. We apply both concepts to the field of neutrality based effective tax rates on the one hand and we discuss their limits under realistic circumstances on the other hand. In both cases our concept provides at least better results than those achieved under the traditional economic income concept.     

Least Squares Model Averaging

This paper considers the problem of selection of weights for averaging across least squares estimates obtained from a set of models. Existing model average methods are based on exponential Akaike information criterion (AIC) and Bayesian information criterion (BIC) weights. In distinction, this paper proposes selecting the weights by minimizing a Mallows criterion, the latter an estimate of the average squared error from the model average fit. We show that our new Mallows model average (MMA) estimator is asymptotically optimal in the sense of achieving the lowest possible squared error in a class of discrete model average estimators. In a simulation experiment we show that the MMA estimator compares favorably with those based on AIC and BIC weights. The proof of the main result is an application of the work of Li (1987).     

Do Benefit Hikes Damage Job Finding? Evidence from Swedish Unemployment Insurance Reforms

Abstract. In 2001 and 2002, Sweden introduced several unemployment insurance reforms. A major innovation in the first reform was the introduction of a two‐tiered benefit structure for some unemployed individuals. This system involved supplementary compensation during the first 20 weeks of unemployment. The 2002 reform retained the two‐tiered benefit structure but involved also substantial benefit hikes for spells exceeding 20 weeks. This paper examines how these reforms affected transitions from unemployment to employment. We take advantage of the fact that the reforms had quasi‐experimental features where the ‘treatments’ differed considerably among unemployed individuals. We find that the reforms had strikingly different effects on job finding among men and women. The two reforms in conjunction are estimated to have increased the expected duration of unemployment among men but to have decreased the duration of unemployment among women. The overall effect on the duration of unemployment is not statistically different from zero. However, the reforms reduced job finding among men who remained unemployed for more than 20 weeks.     

The Effect of Early Cognitive Ability on Earnings Over the Life‐Cycle

This paper utilizes information on cognitive ability at age 10 and earnings information from age 20 to 65 to estimate the return to ability over the life‐cycle. Cognitive ability measured at an early age is not influenced by the individual's choices of schooling. We find that most of the unconditional return to early cognitive ability goes through educational choice. The conditional return is increasing for low levels of experience and non‐increasing for experience above about 15–25 years. The return is similar for men and women, and highest for individuals with academic education. Only a small part of the return can be explained by higher probability of having a supervisory position.     

Modeling for Risk Assessment of Neurotoxic Effects

The regulation of noncancer toxicants, including neurotoxicants, has usually been based upon a reference dose (allowable daily intake). A reference dose is obtained by dividing a no-observed-effect level by uncertainty (safety) factors to account for intraspecies and interspecies sensitivities to a chemical. It is assumed that the risk at the reference dose is negligible, but no attempt generally is made to estimate the risk at the reference dose. A procedure is outlined that provides estimates of risk as a function of dose. The first step is to establish a mathematical relationship between a biological effect and the dose of a chemical. Knowledge of biological mechanisms and/or pharmacokinetics can assist in the choice of plausible mathematical models. The mathematical model provides estimates of average responses as a function of dose. Secondly, estimates of risk require selection of a distribution of individual responses about the average response given by the mathematical model. In the case of a normal or lognormal distribution, only an estimate of the standard deviation is needed. The third step is to define an adverse level for a response so that the probability (risk) of exceeding that level can be estimated as a function of dose. Because a firm response level often cannot be established at which adverse biological effects occur, it may be necessary to at least establish an abnormal response level that only a small proportion of individuals would exceed in an unexposed group. That is, if a normal range of responses can be established, then the probability (risk) of abnormal responses can be estimated. In order to illustrate this process, measures of the neurotransmitter serotonin and its metabolite 5-hydroxyindoleacetic acid in specific areas of the brain of rats and monkeys are analyzed after exposure to the neurotoxicant methylene-dioxymethamphetamine. These risk estimates are compared with risk estimates from the quantal approach in which animals are classified as either abnormal or not depending upon abnormal serotonin levels.     

Behavioral Economics and Regulatory Analysis

Behavioral economics has captured the interest of scholars and the general public by demonstrating ways in which individuals make decisions that appear irrational. While increasing attention is being focused on the implications of this research for the design of risk‐reducing policies, less attention has been paid to how it affects the economic valuation of policy consequences. This article considers the latter issue, reviewing the behavioral economics literature and discussing its implications for the conduct of benefit‐cost analysis, particularly in the context of environmental, health, and safety regulations. We explore three concerns: using estimates of willingness to pay or willingness to accept compensation for valuation, considering the psychological aspects of risk when valuing mortality‐risk reductions, and discounting future consequences. In each case, we take the perspective that analysts should avoid making judgments about whether values are “rational” or “irrational.” Instead, they should make every effort to rely on well‐designed studies, using ranges, sensitivity analysis, or probabilistic modeling to reflect uncertainty. More generally, behavioral research has led some to argue for a more paternalistic approach to policy analysis. We argue instead for continued focus on describing the preferences of those affected, while working to ensure that these preferences are based on knowledge and careful reflection.