2002) Does Family Background Matter? - Returns to Education and Family Characteristics in Germany University of Mannheim

Using data from the GSOEP, we analyze the impact of parents ’ education („family background“) on wages and on returns to education. We show that returns to education are heterogeneous with family background accounting for part of this heterogeneity. While the level of wages is higher for individuals from families with higher education, estimated returns to education are higher for individuals from families with lower education levels. However, a simple regression analysis suffers from serious endogeneity problems. The construction of a sibling sample allows us to perform a family fixed-effect estimation in order to control for unobserved characteristics that are shared by family members. Our results suggest that the conventional estimates overstate the returns to education. Moreover, family background accounts for a large part of the variation in wages in the sibling sample. 1 Financial support from the Deutsche Forschungsgemeinschaft and the Deutscher Akademischer Auslandsdienst (DAAD) is gratefully acknowledged. We would like to thank the Department of Economics at the University of California, Berkeley, for its hospitality and especially Kenneth Chay for helpful advice. Moreover, we would like to thank Axel Börsch-Supan and the participants of the Brown Bag Seminar at the University o