Estimating the Returns to Education for Australian Youth Via Rank-Order Instrumental Variables

Posted: 4 Jan 2006

See all articles by Sarah Rummery

Sarah Rummery

Stephen F. Austin State University - Department of Economics and Finance

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Francis Vella

Georgetown University; IZA Institute of Labor Economics

Abstract

This paper employs the rank-order instrumental variable (IV) procedure of Vella and Verbeek (1997) to estimate the returns to education for Australian youth. The attraction of this approach is that it can account for the endogeneity of schooling in the wage equation via the use of instrumental variables without the use of exclusion restrictions. We find, after accounting for the endogeneity of schooling, that an additional year of schooling is associated with an increase in wages of approximately 8%. Furthermore, we find that the rank-order IV approach is able to identify the presence of endogeneity in this particular empirical example. However, despite this, the adjusted estimate of how schooling affects wage is close to the ordinary least squares (OLS) estimate.

Keywords: instrumental variables, returns to schooling, education

JEL Classification: C21

Suggested Citation

Rummery, Sarah and Verbeek, Marno and Vella, Francis, Estimating the Returns to Education for Australian Youth Via Rank-Order Instrumental Variables. Labour Economics, Vol. 6, pp. 491-507, 1999 , Available at SSRN: https://ssrn.com/abstract=873529

Sarah Rummery

Stephen F. Austin State University - Department of Economics and Finance ( email )

Box 13009, SFA Station
Nacogdoches, TX 75962
United States

Marno Verbeek (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Francis Vella

Georgetown University ( email )

Washington, DC 20057
United States
202-687-5573 (Phone)

HOME PAGE: http://explore.georgetown.edu/people/fgv/

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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