writing_sample - 2 Economists generally agree that an...

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Economists generally agree that an individual’s earnings are positively related to the knowledge and skills obtained through education and experience. Numerous studies show that, on average, people with more years of education do earn higher wages. Although some economists believe that education increases a worker’s productivity and thus differences in wages to a large degree “reflect the ‘skill premium’ commanded by relatively higher-educated, better-trained workers” (Henderson 1), others argue that differences in workers individual characteristics such as talents, personal skills and motivations are the driving forces behind the wage inequality. Supporters of the screening (signaling) theory argue that education allows employers “to screen individuals by innate ability” (Hoff and Stiglitz 405). This claim is based on two arguments: 1) innate abilities of an individual are known to him/her but unobserved by the potential employers and; 2) education is less costly for individuals with higher abilities (in terms of time and efforts required for studying) and, consequently, people with high abilities tend to obtain more education to “signal” to the employers their innate talents. The correlation between unobserved capabilities and education and difficulties in measuring innate abilities of workers makes distinguishing between the two effects difficult and, as some econometricians believe, lead to an overstatement of returns on education-- creates a so called “ability bias”. The estimation of returns on education has important policy implications. If education raises person’s earnings regardless of his/her abilities, then policies that improve the quality of education and provide financial assistance for those willing and able to study should be implemented. If, however, different abilities are the underlying reasons for earnings differentials, as the screening theory claims, then such policies would not be as beneficial. The goal of my paper is to estimate the effect that education has and on wages and to determine how it changes when controlled for ability. For my regression analysis I used the data for 935 men surveyed in 1980. The data set contains information on monthly earnings, education, experience, some demographic characteristics, job location and average weekly hours. After omitting observations with missing values, I had 663 valid observations for male workers, ages 28-38. Among them, about 7.5% completed less than 12 years of schooling (do not have a High School Diploma) with average monthly wages of $760.20, about 40.70% are High School graduates with average monthly wages of $889.04, about 21.27% have associate degrees or some certificates and earn average monthly wages of $1027.49, 18.25% are college graduates 2
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with average monthly salaries of $1104.13 about 12.22% have postgraduate degrees or certificates and earn average monthly wages of $1220.15. About 90% of men are married, 8.14% are black and about 28% live in rural areas. The average wage in the sample is $ 988.48 per month.
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