Schooling, Income, and Reverse Causation

Bryan Caplan:

Economists normally measure the private return to education by estimating a "Micro-Mincer" regression:

(1) log(personal income in $s)= a + b1*(individual education in years)

Given crucial assumptions, b1 is the private return to education. I've discussed some of these crucial assumptions elsewhere. One that I've neglected, though, is the possibility of reverse causation. Maybe higher income (or the expectation of higher income) leads to more education in the same way that higher income leads to more plasma TVs: you buy not as a prudent investment, but because the money's burning a hole in your pocket. If so, b1 overestimates education's private rate of return.

Now you could object that personal income has little effect on educational attainment because individuals pay only a tiny fraction of the bill. If your income suddenly doubled, how many extra years of education would you get in response? An average answer of "one year" seems pretty high, suggesting an extremely small income-->education effect.*

Posted by Jim Zellmer at May 12, 2012 1:42 AM
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