Returns to Education in Germany : An updated assessment of the earnings-education relationship

This work aims at answering the following questions: what is the gain in future earnings from spending one more year in schooling? Do all years in education increase one’s wages by the same amount? Will obtaining a diploma positively affect one’s future wage? By running a Mincer equation enhanced with factors such as sector of employment or gender and using the educational attainment of the parents as an instrumental variable on the 2017 wave of the German Socio-economic Panel, I am able to estimate that in Germany, returns to education are around 10%. To circumvent endogeneity and omitted variable bias, 2SLS is favoured against OLS. Despite this, the results are similar to previous literature which employed a simple OLS on a Mincer equation though it is also found that OLS underestimates returns to education by 1.2%. Returns to the school years themselves are estimated to be more or less stable and fluctuate between 6 and 12% with the exception of the 9th year of schooling which is more impactful at 24% and the 14th at zero. Finally, due to the complex nature of the German educational system, it was not possible to ascertain the existence of diploma effects