Life-cycle bias and the returns to schooling in current and lifetime earnings

The project is part of the research activities at the ESOP center at the Department of Economics, University of Oslo. ESOP is supported by the Research Council of Norway. An earlier version of this paper was circulated as NHH Discussion Paper 2011/4, dated February 29, 2011.Abstract: This paper uses a unique data set with nearly career-long earnings histories to provide evidence on the returns to schooling in current and lifetime earnings. We use these results to assess the importance of life-cycle bias in earnings regressions using current earnings as a proxy for lifetime earnings. To account for the endogeneity of schooling, we apply three commonly used identification strategies. Our estimates demonstrate a strong life-cycle bias, often exceeding the bias from assuming that schooling is exogenous. We further explore the problems caused by life-cycle bias in research on the economic returns to schooling, and discuss possible remedies.Financial support from the Research Council of Norway (194339) is gratefully acknowledged