The Returns to Schooling Unveiled

45 Pages Posted: 2 Apr 2018

See all articles by Ana Rute Cardoso

Ana Rute Cardoso

Instituto de Analisis Economico (IAE-CSIC); Barcelona Graduate School of Economics (Barcelona GSE); IZA Institute of Labor Economics

Paulo Guimaraes

University of South Carolina - Darla Moore School of Business; IZA Institute of Labor Economics

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

Hugo Reis

Banco de Portugal

Abstract

We bring together the strands of literature on the returns to education, its spillovers, and the role of the employer shaping the wage distribution. The aim is to analyze the labor market returns to education taking into account who the worker is (worker unobserved ability), what he does (the job title), with whom (the coworkers) and, also crucially, for whom (the employer). We combine data of remarkable quality – exhaustive longitudinal linked employer-employee data on Portugal – with innovative empirical methods, to address the homophily or reflection problem, selection issues, and common measurement errors and confounding factors. Our methodology combines the estimation of wage regressions in the spirit of Abowd, Kramarz, and Margolis (1999), Gelbach's (2016) unambiguous conditional decomposition of the impact of various omitted covariates on an estimated coefficient, and Arcidiacono et al.'s (2012) procedure to identify the impact of peer quality.We first uncover that peer effects are quite sizeable. A one standard deviation increase in the measure of peer quality leads to a wage increase of 2.1 log points. Next, we show that education grants access to better-paying firms and job titles: one fourth of the overall return to education operates through the firm channel and a third operates through the job-title channel, while the remainder is associated exclusively with the individual worker. Finally, we unveil that an additional year of average education of coworkers yields a 0.5 log points increase in a worker's wage, after we net out a 2.0 log points return due to homophily (similarity of own and peers' characteristics), and 3.3 log points associated with worker sorting across firms and job titles.

Keywords: wage distribution, human capital spillovers, returns to education, peer effects, linked employer-employee data, high-dimensional fixed effects, firm, job title

JEL Classification: J31, J24, I26

Suggested Citation

Cardoso, Ana Rute and Guimaraes, Paulo and Portugal, Pedro and Reis, Hugo, The Returns to Schooling Unveiled. IZA Discussion Paper No. 11419, Available at SSRN: https://ssrn.com/abstract=3153383

Ana Rute Cardoso (Contact Author)

Instituto de Analisis Economico (IAE-CSIC) ( email )

Campus UAB
Barcelona, Bellaterra 08193
Spain
3436917157 (Phone)

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany
492283894508 (Phone)
492273894510 (Fax)

Paulo Guimaraes

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Pedro Portugal

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085
Portugal

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Hugo Reis

Banco de Portugal ( email )

148, Rua do Comercio
Lisbon, P - 1101
Portugal

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
39
Abstract Views
405
PlumX Metrics