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The Causal Effect of Education on Wages Revisited

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  • Thanks to two anonymous referees for useful comments and also to seminar participants at University of Warwick, the Centre for Market and Public Organisation, the Work and Pensions Economics Group, EALE and IWAEE. Thanks also to the ESRC who provided the funding for this research under grant PTA-026-27-2132.

Abstract

This study estimates the return to education in Britain using two instrumental variable (IV) estimators: one exploits variation in schooling associated with early smoking, the other uses the raising of the school leaving age; both affect a sizeable proportion of the sample. Early smoking is found to be a strong and valid IV and unlike previous IV strategies uses variations in education at numerous points across the distributions of (i) education, and (ii) ability. Thus whilst still a ‘local average treatment effect’ the estimate is closer to the average effect of additional education, akin to least squares but corrected for endogeneity.

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