Date of Award
Bachelor of Arts
Return to education is the rate of return to income with each additional year of schooling. This paper utilizes data from the Panel Study of Income Dynamics (PSID) in 2012 to examine return to education in the U.S. I use the Mincer earnings function (Mincer, 1974) as a basic model to evaluate the relationship between relationship between school and earnings. I augment this wage function with control variables including gender, region, family economic background, and job industry to decrease the influence from other factors on the relationship between income and schooling. Then, in order to eliminate ability bias in the model, I use the method of instrumental variable (IV), with the father's and mother's education as instruments for schooling, to re-examine return to education. The results from using the augmented wage function indicate that the ordinary least square (OLS) estimate (5.87%) is downward-biased compared to the IV estimate (10.2%). These findings are aligned with findings from previous research. This study contributes to the field by updating the rate of return to education for year 2012 and showing that parental education is closely related with children's rate of return to education, which provide possible future policy directions on how to get better results from spending on education.
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Shi, Zhirou, "Effects of Parental Education on Return to Education" (2016). Economics Student Theses and Capstone Projects. 1.