Natural experiments and the return to schooling

Cowen’s First Law: There is a literature on everything.

Responding to queries from Kling and Caplan and Henderson, let us turn the microphone over to Andrew Leigh and Chris Ryan:

How much do returns to education differ across different natural experiment methods? To test this, we estimate the rate of return to schooling in Australia using two different instruments for schooling: month of birth and changes in compulsory schooling laws. With annual pre-tax income as our measure of income, we find that the naıve ordinary least squares (OLS) returns to an additional year of schooling is 13%. The month of birth IV approach gives an 8% rate of return to schooling, while using changes in compulsory schooling laws as an IV produces a 12% rate of return. We then compare our results with a third natural experiment: studies of Australian twins that have been conducted by other researchers. While these studies have tended to estimate a lower return to education than ours, we believe that this is primarily due to the better measurement of income and schooling in our data set. Australian twins studies are consistent with our findings insofar as they find little evidence of ability bias in the OLS rate of return to schooling. Together, the estimates suggest that between one-tenth and two-fifths of the OLS return to schooling is due to ability bias. The rate of return to education in Australia, corrected for ability bias, is around 10%, which is similar to the rate in Britain, Canada, the Netherlands, Norway and the United States.

There are many other papers in this genre, such as by Joshua Angrist, and they yield broadly similar results.  Here is an Esther Duflo paper on Indonesia.  There is an excellent David Card survey on the causal returns to education, from 1999, but more recent results have shown the same.  Card’s conclusion:

Consistent with earlier surveys of the literature, I conclude that the average (or average marginal) return to education is not much below the estimate that emerges from a standard human capital earnings function fit by OLS. Evidence from the latest studies of identical twins suggests a small upward “ability” bias – on the order of 10%. A consistent finding among studies using instrumental variables based on institutional changes in the education system is that the estimated returns to schooling are 20-40% above the corresponding OLS estimates.

That last sentence is because the marginal student is especially in need of education.  The view that education is mostly about signaling is inconsistent with the established consensus on the returns to schooling and yet the writers at EconLog do not respond to this literature or, as far as I can tell, even acknowledge it.

Here is one of my earlier posts on education.  Here is my theory of (some) education.