Hidden Schooling: Repeated Grades and the Returns to Education and Experience

Over the past four decades, nearly 25% of all American public school students repeated at least one grade in primary or secondary school, and ninth grade repeating increased four-fold. Despite its prevalence, few economists have attempted to account for grade repeating when estimating the returns to education and experience. I show that 10% of the increase in ninth grade repeating was caused by changes in compulsory schooling laws (CSLs). Because CSLs increase both grade repeating and educational attainment, compulsory education-based IV estimates of the returns to education are positively biased by up to 38%. Additionally, grade repeating causes endogenous measurement error in labor market experience. Solely through this measurement error, I show that the residual black-white wage gap is overstated by 10%, the wage return to a high school diploma is overstated by 11% relative to dropouts, and the labor supply gap between dropouts and high school graduates is overstated by 23%. Controlling for age instead of experience reduces this bias, suggesting age should be a standard control variable for reduced-form analysis, not experience