DP2518 Education Policy Reform and the Return to Schooling from Instrumental Variables

Author(s): Kevin Denny, Colm Harmon
Publication Date: July 2000
Keyword(s): Earnings, Education, Instrumental Variables, Ireland
JEL(s): C31, J24, J31
Programme Areas: Labour Economics, Public Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2518

This paper exploits an unusual policy reform that had the effect of reducing the direct cost of schooling in Ireland in the late 1960’s. This gave rise to an increased level of schooling but with effects that vary substantially across family background. This interaction of educational reform and family background generates a set of instrumental variables that are used to estimate the return to schooling allowing for the endogeneity of schooling. Using a standard Mincer type model we find a large and well-determined rate of return of around 12% which is substantially higher than the OLS estimates of around 7%.