Upward bias in the estimated returns to education: Evidence from South Africa

Type Journal Article - The American Economic Review
Title Upward bias in the estimated returns to education: Evidence from South Africa
Volume 93
Issue 4
Publication (Day/Month/Year) 2003
Page numbers 1354-1368
URL https://www.researchgate.net/profile/Thomas_Hertz/publication/4726973_Upward_Bias_in_the_Estimated_R​eturn_to_Education_Evidence_from_South_Africa/links/0c960527266685eb03000000.pdf
Ordinary least-squares (OLS) estimates of
the proportionate increase in wages due to an
extra year of education in the United States (the
Mincerian rate of return) are believed to be
reasonably consistent. It appears that upward
bias due to omitted variables is roughly offset
by attenuation bias due to errors in the measurement
of schooling. Orley Ashenfelter and Cecilia
Rouse (1998) find a net upward bias on the
order of just 10 percent of the magnitude of the
OLS estimate. David Card’s (2001) survey of
instrumental variables-based estimates reaches
a similar conclusion, as do Ashenfelter et al.
This result need not obtain in all countries at
all times.1 Some (e.g., David Lam and Robert F.
Schoeni, 1993) have suggested that omitted
variables bias might be larger in less developed
economies, where liquidity constraints and family
background are likely to be important determinants
of both education and earnings. To
date, however, there are few estimates of the
returns to schooling in developing countries that
take account of both omitted variables and measurement
error; an exception is Esther Duflo
(2001) who finds no net upward bias for Indonesia.2
In this paper I use the familiar withinfamily
(fixed-effects) approach, as well as
variants of the family-effects models described
by Ashenfelter and David J. Zimmerman (1997)
and Card (1999), to minimize omitted variables
bias in a South African data set from 1993. I
exploit the fact that about 13 percent of respondents
were resurveyed (in 1998) to derive estimates
of the reliability of measured schooling,
which turns out to be rather low (on the order of
0.77). This suggests that the within-family
fixed-effects estimates should be biased downwards
to a considerable extent (Zvi Griliches,
1979). However, I also show that errors in the
schooling variable are strongly correlated
within the family, and that this reduces the
degree of attenuation bias in the fixed-effects
model. After correcting for these correlated,
nonclassical measurement errors, I arrive at
schooling coefficients for Africans that are less
than half as large as the ordinary least-squares
results. My preferred specification yields results
on the order of 5 to 6 percent, whereas the initial
OLS figures are 11 to 13 percent.

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