The Schooling Quality-Earnings Relationship: Using Economic Theory to Interpret Functional Forms Consistent with the Evidence

65 Pages Posted: 25 May 2006  

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)

Anne Layne-Farrar

Charles River Associates; Northwestern University

Petra Todd

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

Date Written: October 1995

Abstract

This paper investigates the economic and empirical foundations of the evidence relating earnings to schooling quality. We replicate the Card-Krueger model for Census years 1970, 1980 and 1990 and find that it consistently produces a strong relationship between schooling quality and the rate of return to schooling. We test key identifying assumptions used by Card and Krueger and others. Several assumptions are rejected. When they are relaxed, the evidence for a strong effect of schooling quality on earning is greatly weakened. A crucial identifying assumption is the absence of selective migration on the basis of earnings. Nonparametric tests strongly reject this hypothesis. The conventional assumption of linearity of the earnings- schooling relationship widely used in the literature is also rejected. The only surviving evidence of any schooling quality effect is in the return to college education. We also test and reject conventional efficiency unit models of the pricing of labor services. The empirically concordant model of earnings is a model of heterogeneous human capital in which regional shocks affect the prices of less- skilled labor.

Suggested Citation

Heckman, James J. and Layne-Farrar, Anne and Todd, Petra, The Schooling Quality-Earnings Relationship: Using Economic Theory to Interpret Functional Forms Consistent with the Evidence (October 1995). NBER Working Paper No. w5288. Available at SSRN: https://ssrn.com/abstract=225352

James J. Heckman (Contact Author)

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Anne Layne-Farrar

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Petra Todd

University of Pennsylvania - Department of Economics ( email )

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