Education, unemployment, earnings: decomposing the effect of education on earnings

The return of education on earnings does not express only the effect on wages; it expresses and includes also the effect that education has on working time (both employment and labour supply). Following the methodology of Ashenfelter and Ham (1979) we first estimate the return of education on annual earnings and subsequently decompose it in a return on monthly wages, an effect on labour supply and an effect on unemployment. We conclude that the return on annual earnings is always higher than the effect on monthly wages, which confirms our initial hypothesis. This employment effect comes from the effect of education on labour supply as well as from the effect of education on unemployment; both are high and statistically significant. Finally we find that our sample (individuals 18-30 at their early career stages) has affected the results leading to a positive schooling coefficient for unemployment. However, for older individuals, the negative relationship between unemployment and education is re-established