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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Definitions:

Disadvantage

A condition or situation that causes a reduction in effectiveness, efficiency, or benefit.

Individual Responsiveness

The degree to which a person reacts or responds to stimuli or experiences.

Emotional Support

Refers to the assistance given to individuals through empathy, concern, and encouragement to help them cope with emotional distress.

Advantage

A condition or circumstance that puts one in a favorable or superior position compared to others.