Are OLS estimates of the return to schooling biased downward? Another look

Abstract

The authors examine evidence on bias in OLS estimates of the economic return to schooling. To study omitted-ability bias, test scores available in the US National Longitudinal Survey of Youth were used as proxies for ability allowing for measurement error in these test scores. The authors also explore biases from the endogeneity of schooling or experience, or measurement error in these variables. In the data, OLS estimation including test scores appears to be appropriate and indicates an upward bias of roughly 40% in the OLS estimate ignoring ability. This contrasts with evidence from other recent research using different statistical experiments to purge schooling of its correlation with the wage equation error. -from Authors