Individual heterogeneity in the returns to schooling: instrumental variables quantile regression using twins data

  • Omar Arias
  • Kevin F. Hallock
  • Walter Sosa-Escudero
Part of the Studies in Empirical Economics book series (STUDEMP)


Considerable effort has been exercised in estimating mean returns to education while carefully considering biases arising from unmeasured ability and measurement error. Recent work has investigated whether there are variations from the “mean” return to education across the population with mixed results. We use an instrumental variables estimator for quantile regression on a sample of twins to estimate an entire family of returns to education at different quantiles of the conditional distribution of wages while addressing simultaneity and measurement error biases. We test whether there is individual heterogeneity in returns to education and find that: more able individuals obtain more schooling perhaps due to lower marginal costs and/or higher marginal benefits of schooling and that higher ability individuals (those further to the right in the conditional distribution of wages) have higher returns to schooling consistent with a non-trivial interaction between schooling and unobserved abilities in the generation of earnings. The estimated returns are never lower than 9 percent and can be as high as 13 percent at the top of the conditional distribution of wages but they vary significantly only along the lower to middle quantiles. Our findings may have meaningful implications for the design of educational policies.

Key words

Returns to Education Human Capital Heterogeneity Quantile Treatment Effects Instrumental Variables. 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Abadie A, Angrist J, Imbens G (2000) Instrumental variables estimates of the effects of subsidized training on the quantiles of trainee earnings. Working paperGoogle Scholar
  2. Amidon C (1997) Are female wage earners experiencing wage discrimination: An application of quantile regression. University of Illinois at Urbana-Champaign, JuneGoogle Scholar
  3. Angrist JD (1995) Conditioning on the probability of selection to control selection bias. NBER Technical Working Paper No. 181, JuneGoogle Scholar
  4. Angrist JD, Krueger AB (1991) Does compulsory schooling affect schooling and earnings? Quarterly Journal of Economics 196: 979–1014CrossRefGoogle Scholar
  5. Angrist JD, Krueger AB (1992) Estimating the payoff to schooling using the Vietnam-Era draft lottery. National Bureau of Economic Research Working Paper: 4067, MayGoogle Scholar
  6. Angrist JD, Newey W (1991) Over-identification tests in earnings functions with fixed effects. Journal of Business and Economic Statistics 9: 317–23Google Scholar
  7. Ashenfelter O, Krueger AB (1994) Estimates of the returns to schooling from a new sample of twins. American Economic Review 84 (5): 1157–1173Google Scholar
  8. Ashenfelter O, Rouse C (1998) Income, schooling, and ability: Evidence from a new sample of identical twins. Quarterly Journal of Economics 113 (1): 253–84CrossRefGoogle Scholar
  9. Becker G (1967) Human capital and the personal distribution of income. Ann Arbor, University of Michigan PressGoogle Scholar
  10. Behrman J, Hrubec Z, Taubman P, and Wales T, (1980) Socioeconomic success: A study of the effects of genetic endowments, family environment, and schooling. North-HollandGoogle Scholar
  11. Bound J, Solon G (1999) Double trouble: On the value of twins-based estimation of the return to schooling. Economics of Education Review 18 (2): 169–182CrossRefGoogle Scholar
  12. Buchinsky M (1994) Changes in the U.S. wage structure 1963–1987: An application of quantile regression. Econometrica 62 (2): 405–58CrossRefGoogle Scholar
  13. Buchinsky M (1995) Estimating the asymptotic covariance matrix for quantile regression models: A montecarlo study. Journal of Econometrics 68: 303–338CrossRefGoogle Scholar
  14. Butcher KF, Case A (1994) The effect of sibling composition on women’s education and earnings. Quarterly Journal of Economics 109: 531–564CrossRefGoogle Scholar
  15. Card D (1995a) Earnings, schooling and ability revisited. Research in Labor Economics, Polachek S (ed.), JAI Press, 14:23–48Google Scholar
  16. Card D (1995b) Using geographic variation in college proximity to estimate the return to schooling. In: L. Christofides EG, Swidinsky R, (eds.) Aspects of Labour Market Behaviour: Essays in Honor of John Vanderkamp, University of Toronto Press, pp. 201–22Google Scholar
  17. Card D (1999) The causal effect of education on earnings. In: Ashenfelter 0, Card D, (eds.) Handbook of Labor Economics, Volume 3A, North Holland, pp. 1801–1863Google Scholar
  18. Card D, Krueger A (1992) Does school quality matter? Returns to education and the character- istics of public schools in the United States. Journal of Political Economy 100 (1): 1–40CrossRefGoogle Scholar
  19. Chamberlain G (1994) Quantile regression, censoring, and the structure of wages. In: Sims, C (ed.) Advances in Econometrics, 6th World Congress, Cambridge University Press, pp. 171–209CrossRefGoogle Scholar
  20. Chay K, Lee D (1996) Changes in relative wages in the 1980s: Returns to observed and unobserved skills and black-white wage differentials. Princeton University Industrial Relations Section Working Paper # 372Google Scholar
  21. Chen LA (1988) Regression quantiles and trimmed least squares estimators for structural equations and non-linear regression models. Unpublished Ph.D. dissertation, University of Illinois at Urbana-ChampaignGoogle Scholar
  22. Chen L, Portnoy S (1996) Two-staged regression quantiles and two-staged trimmed least-squares estimators for structural equation models. Communication in Statistics: Theory and Methods 25 (5): 1005–32CrossRefGoogle Scholar
  23. Conneely K, Uusitalo R (1998) Estimating heterogeneous treatment effects in the becker schooling model. MimeoGoogle Scholar
  24. DiNardo J, Fortin N, Lemieux, T (1996) Labor market institutions and the distribution of wages, 1973–1992: A semiparametric approach. Econometrica 64 (5): 1001–1044.CrossRefGoogle Scholar
  25. DiNardo J, Lemieux T, (1996) Diverging male wage inequality in the United States and Canada, 1981–1988: Do institutions explain the difference? Industrial and Labor Relations Review 50 (4): 629–51CrossRefGoogle Scholar
  26. Fitzenberger B, Kurz C (1998) New insights on earnings trends across skill groups and industries in West Germany. Working paperGoogle Scholar
  27. Griliches Z (1977) Estimating the returns to schooling: Some econometric problems. Econometrica 45: 1–22CrossRefGoogle Scholar
  28. Griliches Z (1979) Sibling models and data in economics: Beginnings of a survey. Journal of Political Economy 87: S37–64CrossRefGoogle Scholar
  29. Gutenbrunner C, Jureckova J, Koenker R, Portnoy S (1993) Tests of linear hypotheses based on regression rank scores. Journal of Nonparametric Statistics 2: 307–331CrossRefGoogle Scholar
  30. Heckman J, Polachek S (1974) Empirical evidence on the functional form of the earnings-schooling relationship. Journal of the American Statistical Association 69 (346): 350–4CrossRefGoogle Scholar
  31. Heckman J, Robb R Jr. (1985) Alternative methods for evaluating the impact of interventions: An overview. Journal of Econometrics 30 (1–2): 239–67CrossRefGoogle Scholar
  32. Heckman J, Layne-Farrar A, Todd P (1996) Human capital pricing equations with an application to estimating the effect of schooling quality on earnings. Review of Economics and Statistics 78 (4): 562–610CrossRefGoogle Scholar
  33. Heckman J, Vytlacil E (1998) Instrumental variables methods for the correlated random coefficient model: Estimating the average rate of return to schooling when the return is correlated with schooling. Journal of Human Resources 33 (4): 974–87CrossRefGoogle Scholar
  34. Hungerford T, Solon G (1987) Sheepskin effects in the returns to education. Review of Economics and Statistics 69: 175–7CrossRefGoogle Scholar
  35. Jaeger D, Page M (1996) Degrees Matter: New evidence on sheepskin effects in returns to education. Review of Economics and Statistics 78 (4): 733–40CrossRefGoogle Scholar
  36. Kane TJ, Rouse CE, (1995) Market returns to two-and four-year colleges. American Economic Review 85 (3): 600–14Google Scholar
  37. Koenker R (1994) Confidence intervals for regression quantiles. In: Mandl P. Huskova M. (eds.), Asymptotic Statistics: Proceedings of the 5th Prague Symposium, Physica-Verlag, Heidleberg, 1994Google Scholar
  38. Koenker R, D’Orey V (1993) Computing regression quantiles. Applied Statistics 36:383–393 and 43: 410–414Google Scholar
  39. Koenker R, Bassett G (1978) Regression quantiles. Econometrica 46 (1): 1–26CrossRefGoogle Scholar
  40. Koenker R, Bassett G (1982) Robust tests for heteroscedasticity based on regression quantiles. Econometrica 50 (1): 43–61CrossRefGoogle Scholar
  41. Koenker R, Portnoy S (1997) Quantile regression. Office of Research Working Paper #97–0100, College of Commerce and Business Administration, University of Illinois at Urbana-ChampaignGoogle Scholar
  42. Levin J (2000) Where the reducation count: A quantile regression analysis of the effects of class size on scholastic achievement. Working paper, University of AmsterdamGoogle Scholar
  43. Machado JAF, Mata J (2000) Sources of increased wage inequality. MimeoGoogle Scholar
  44. Mincer J (1974) Schooling, experience and earnings. National Bureau of Economic Research, Columbia University PressGoogle Scholar
  45. Mwabu G, Schultz TP (1996) Education returns across quantiles of the wage function: Alternative explanations for returns to education by race in South Africa. American Economic Review 86 (2): 335–9Google Scholar
  46. Park JH (1994) Returns to schooling: A peculiar deviation from linearity. Princeton University Industrial Relations Section Working Paper # 335Google Scholar
  47. Psacharopoulos G, Ng YC (1994) Earnings and education in Latin America. Education Economics 2 (2): 187–207CrossRefGoogle Scholar
  48. Powell J (1983) The asymptotic normality of two-stage least absolute deviations estimators. Econometrica 51 (5): 1569–1575CrossRefGoogle Scholar
  49. Pritchett L (1997) Where has all the education gone? PRD Working Paper Series No. 1581, The World BankGoogle Scholar
  50. Ribeiro E (1996) The effect of personal income taxes on labor supply in Brazil: An application of quantile regression. Ph.D. Dissertation, University of Illinois at Urbana-ChampaignGoogle Scholar
  51. Ribeiro E (2000) Asymmetric labor supply. Universidade Federal do Rio Grande do Sul, BrazilGoogle Scholar
  52. Rosen S (1973) Income generating functions and capital accumulation. Harvard Institute of Economic Research, Discussion Paper 306Google Scholar
  53. Rouse C (1999) Further estimates of the economic return to schooling from a new sample of twins. Economics of Education Review 18 (2): 149–57CrossRefGoogle Scholar
  54. Sosa-Escudero W (1997) Revenue and the welfare effects of infrastructure in the telecommunications industry. A Quantile Regression Exploration. Mimeo, University of Illinois at Urbana-ChampaignGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2002

Authors and Affiliations

  • Omar Arias
    • 1
  • Kevin F. Hallock
    • 2
  • Walter Sosa-Escudero
    • 3
  1. 1.Inter-American Development BankUSA
  2. 2.Department of EconomicsUniversity of IllinoisChampaignUSA
  3. 3.Department of EconomicsUniversidad Nacional de la PlataLa PlataUSA

Personalised recommendations