The Causal Effect of Education on Earnings

This paper surveys the recent literature on the causal relationship between education and earnings. I focus on four areas of work: C theoretical and econometric advances in modeling the causal effect of education in the presence of heterogeneous returns to schooling. C recent studies that use institutional aspects of the education system to form instrumental variables estimates of the return to schooling. C recent studies of the earnings and schooling of twins. C recent attempts to explicitly model sources of heterogeneity in the returns to education. Consistent with earlier surveys of the literature, I conclude that the average (or average marginal) return to education is not much below the estimate that emerges from a standard human capital earnings function fit by OLS. Evidence from recent studies of identical twins suggests a small upward "ability" bias -on the order of 10 percent. A consistent finding among studies using instrumental variables based on institutional changes in the education system is that the estimated returns to schooling are 20-40 percent above the corresponding OLS estimates. Part of the explanation for this finding may be that marginal returns to schooling for certain subgroups -particularly relatively disadvantaged groups with low education outcomes -are higher than the average marginal returns to education in the population as a whole. David Card Department of Economics 549 Evans Hall University of California, Berkeley Berkeley, CA 94720-3880