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Schooling_6 - Returns to Schooling Is education a good...

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1 Returns to Schooling Ch 9 pp.297-300, 310-311 Returns to Schooling Is education a good investment? Why? Economists who have asked the question – Is education a good investment? – have estimated the internal rate of return to schooling. What does the internal rate of return tell you about schooling as an investment? How would you measure the internal rate of return to schooling? Returns to Schooling Knowing the internal rate of return to schooling allows us to compare schooling with other investments. – If the returns to schooling are higher then the returns to other investments, then schooling is a good investment. – If the returns to schooling are lower, then schooling may be a bad investment. – Typical estimates for the returns to schooling for the average American are between 5 and 12%, which is similar to stocks, bonds and real estate. Returns to Schooling Measuring the internal rate of return to schooling is complicated. Here is a simple way of calculating the returns to schooling: – W C is the average wages of college graduates. – W H is the average wages of high school graduates. R is the percentage difference in wages for college graduates versus high school graduates. What is the problem with this estimate? __ __ ^ ^ W C – W H W H R = __ __ __ Returns to Schooling One problem with this estimate is that high school graduates are different from the college graduates. We want to compare what John Smith would make as a high school graduate to what John Smith would make as a college graduate. A second problem is that there may be other benefits to college not accounted for by wages, such as better working conditions, lower risk of injury or health problems, better employee benefits, etc. ^ W C – W H W H R = __ __ __ Conventional Regression Equation Returns to schooling can be estimated in a similar way using regression analysis. ln W i = α + β S i + ε i W i is the wage level of individual i. S i is the number of years of schooling for individual i. Using the log of wages as the dependent variable means that the estimate of β will be measured in percentage terms.
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