Selection bias and human capital investment

Abstract

This paper provides a new method of estimating the rate of return to education. We focus on: (i) the effect of education over-and under-achievement on an individual's earnings, and (ii) how personal and job characteristics affect income at different education levels. In both instances we find important effects. Education over-achievement, defined relative to the expected education level given an individual's socio-economic background, reduces earnings relative to the average earnings of the education group chosen. Individual characteristics also affect earnings differently at each education level. We conclude that these effects cast doubt on the use of conventional methods of estimating rates of return to education for assessing the marginal returns to education expansion. Show more