Life-Cycle Bias and the Returns to Schooling in Current and Lifetime Earnings
43 Pages Posted: 6 Mar 2011 Last revised: 7 Mar 2011
Date Written: February 25, 2011
This paper provides evidence on the returns to schooling in current and lifetime earnings. We use these results to assess the importance of life-cycle bias in earnings regressions using current earnings as proxy for lifetime earnings. To account for the endogeneity of schooling, we apply three commonly used identification strategies. Our estimates demonstrate a strong life-cycle bias, often exceeding the bias from assuming that schooling is exogenous. We also find that the cross-section estimates of the returns to schooling are highly sensitive to the age composition of the sample. They tend to increase with mean age, reflecting that higher educated workers experience more rapid earnings growth through most of the life-cycle. We further show that the returns to schooling in lifetime earnings are relatively low compared to what previous evidence based on cross-section data suggest.
Suggested Citation: Suggested Citation