Earnings Functions Provide a Measure, Among Other Things, of the Returns

question 28

Essay

Earnings functions provide a measure, among other things, of the returns to education. It has been argued these regressions contain a serious omitted variable bias due to differences in abilities. Furthermore, ability is hard to measure and bound to be highly correlated with years of schooling. Hence the standard estimate of about a 10 percent return to every year of schooling is upward biased. Suggest some ways to address this problem. One famous study looked at earnings of identical twins. Explain how this can be viewed as a quasi-experiment, and mention some of the threats to internal and external validity that such a study might encounter.

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