Persistence Bias and the Wage-Schooling Model

20 Pages Posted: 2 Feb 2013

See all articles by Corrado Andini

Corrado Andini

IZA Institute of Labor Economics

Abstract

This paper provides an expression for the bias of the OLS estimator of the schooling coefficient in a simple static wage-schooling model where earnings persistence is not accounted for. It is argued that the OLS estimator of the schooling coefficient is biased upward, and the bias is increasing with potential labor-market experience and the degree of earnings persistence. In addition, NLSY data are used to show that the magnitude of the persistence bias is non-negligible, and the bias cannot be cured by increasing the control set. Further, it is shown that disregarding earnings persistence is still problematic for the estimation of the schooling coefficient even if individual unobserved heterogeneity and endogeneity are taken into account. Overall, the findings support the dynamic approach to the estimation of wage-schooling models recently suggested by Andini (2012; 2013).

Keywords: schooling, wages, dynamic panel-data models

JEL Classification: C23, I21, J31

Suggested Citation

Andini, Corrado, Persistence Bias and the Wage-Schooling Model. IZA Discussion Paper No. 7186. Available at SSRN: https://ssrn.com/abstract=2210846

Corrado Andini (Contact Author)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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