Earnings Functions and Rates of Return

40 Pages Posted: 23 May 2008

See all articles by James J. Heckman

James J. Heckman

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); American Bar Foundation; Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

Lance Lochner

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER)

Petra Todd

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Abstract

The internal rate of return to schooling is a fundamental economic parameter that is often used to assess whether expenditure on education should be increased or decreased. This paper considers alternative approaches to estimating marginal internal rates of return for different schooling levels. We implement a general nonparametric approach to estimate marginal internal rates of return that take into account tuition costs, income taxes and nonlinearities in the earnings-schooling-experience relationship. The returns obtained by the more general method differ substantially from Mincer returns in levels and in their evolution over time. They indicate relatively larger returns to graduating from high school than from graduating from college, although both have been increasing over time.

Keywords: schooling, marginal internal rate of return, nonparametric estimation

JEL Classification: C31

Suggested Citation

Heckman, James J. and Lochner, Lance and Todd, Petra, Earnings Functions and Rates of Return. , Vol. , pp. -, . Available at SSRN: https://ssrn.com/abstract=1135886 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

James J. Heckman (Contact Author)

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Lance Lochner

University of Western Ontario - Department of Economics ( email )

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Petra Todd

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Germany

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