Omitted-Ability Bias and the Increase in the Return to Schooling

Abstract

Over the 1980s, there were sharp increases in the return to schooling estimated with conventional wage regressions. We explore whether the relationship between ability and schooling changed over this period in ways that would have increased the schooling coefficient in these regressions. Our empirical results reject the hypothesis that an increase in the bias of the schooling coefficient, due to a change in the relationship between ability and schooling, has contributed to observed increases in the return to schooling. We also find that the increase in the schooling return has occurred for workers with relatively high levels of academic ability.

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