Schooling Laws, School Quality, and the Returns to Schooling∗

Educational attainment increased sharply during the first part of the 20th century as compulsory schooling laws became more stringent and school quality greatly improved. Since prior research finds that school quality gains contributed to increased education levels during this period, causal estimates of the returns to schooling which use schooling laws as instruments but ignore the contemporaneous changes in school quality may yield biased results. We find that the estimated returns to schooling become insignificant and either close to zero or negative when we account for school quality even when quality is measured at the regional level. We derive a decomposition which highlights that standard models exploiting variation in state-level legislative changes are identified both by changes within states over time and by differences between regions over time. We find that causal estimates of the returns to schooling using compulsory schooling laws are, in fact, driven by between-region differences over time rather than by the within-state variation in schooling laws that is typically thought to be the main source of identification.