Uncertainty and Heterogeneity in Returns to Education: Evidence from Finland

Kässi, Otto (2012): Uncertainty and Heterogeneity in Returns to Education: Evidence from Finland.

Abstract

This paper studies the causal effect of education on income uncertainty using a broad measure of income which encompasses unemployment risk. To accomplish this, the variance of residuals from a Mincer-type income regression is decomposed into unobserved heterogeneity (known to the individual when making their educational choices) and uncertainty (unknown to the individual). The estimation is done using Finnish registry data. The marginal effect of having a secondary or a lower tertiary level education decreases income uncertainty. University level education is found to have a small positive marginal effect on income uncertainty. The effect of education on income uncertainty is roughly similar for men in comparison to women, but income uncertainty is larger for men than for women regardless of education. Contrary to some results from the U.S., the role of unobserved heterogeneity is found to be very small.

• Item Type: MPRA Paper
• Language: English
• Keywords: earnings uncertainty; unobserved heterogeneity; permanent earnings uncertainty; transitory shocks
• Subjects: J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C35 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions

References

Aakvik, Arild, Salvanes, Kjell G., & Vaage, Kjell. 2010. Measuring heterogeneity in the returns to education using an education reform. European Economic Review, 54(4), 483 – 500.

Abadie, Alberto, Angrist, Joshua, & Imbens, Guido. 2002. Instrumental Variables Estimates of the Effect of Subsidized Training on the Quantiles of Trainee Earnings. Econometrica, 70(1), 91–117.

Acemoglu, Daron, & Autor, David. 2011. Skills, Tasks and Technologies: Implications for Employment and Earnings. Handbook of Labor Economics, vol. 4. Elsevier. Chap. 12, pages 1043–1171.

Barro, Robert J., & Lee, Jong-Wha. 2010 (Apr.). A New Data Set of Educational Attainment in the World, 1950-2010. NBER Working Papers 15902. National Bureau of Economic Research, Inc.

Bedi, Arjun S., & Gaston, Noel. 1999. Using variation in schooling availability to estimate educational returns for Honduras. Economics of Education Review, 18(1), 107–116.

Betts, Julian R. 1995. Does School Quality Matter? Evidence from the National Longitudinal Survey of Youth. The Review of Economics and Statistics, 77(2), 231–50.

Björklund, Anders, & Jäntti, Markus. 2012. How important is family background for labor-economic outcomes? Labour Economics, 19(4), 465 – 474.

Cameron, Stephen V., & Heckman, James J. 1998. Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males. Journal of Political Economy, 106(2), 262–333.

Card, David. 1993 (Oct.). Using Geographic Variation in College Proximity to Estimate the Return to Schooling. NBER Working Papers 4483. National Bureau of Economic Research, Inc.

Chen, Stacey H. 2008. Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity. The Review of Economics and Statistics, 90(2), 275– 289.

Cunha, Flavio, & Heckman, James. 2008. A New Framework For The Analysis Of Inequality. Macroeconomic Dynamics, 12(S2), 315–354.

Cunha, Flavio, & Heckman, James J. 2007. Identifying and Estimating the Distributions of Ex Post and Ex Ante Returns to Schooling. Labour Economics, 14(6), 870– 893.

Cunha, Flavio, Heckman, James, & Navarro, Salvador. 2005. Separating uncertainty from heterogeneity in life cycle earnings. Oxford Economic Papers, 57(2), 191–261. Griliches, Zvi. 1977. Estimating the Returns to Schooling: Some Econometric Problems. Econometrica, 45(1), 1–22.

Guiso, Luigi, Jappelli, Tullio, & Pistaferri, Luigi. 2002. An Empirical Analysis of Earnings and Employment Risk. Journal of Business & Economic Statistics, 20(2), 241–53.

Heckman, James J. 1979. Sample Selection Bias as a Specification Error. Econometrica, 47(1), pp. 153–161.

Kirjavainen, Tanja. 2009. Essays on the efficiency of schools and student achievement. VATT publications 53.

Kramarz, Francis, Machin, Stephen, & Ouazad, Amine. 2009 (Jan.). What Makes a Test Score? The Respective Contributions of Pupils, Schools and Peers in Achievement in English Primary Education. CEE Discussion Papers 0102. Centre for the Economics of Education, LSE.

Maddala, G. S. 1987. Limited-dependent and qualitative variables in econometrics. Cambridge : Cambridge University Press,.

Mazza, Jacopo, & van Ophem, Hans. 2010. Separating Risk in Education from Heterogeneity: a Semiparametric Approach. Tinbergen Institute Discussion Papers. Tinbergen Institute.

Mazza, Jacopo, van Ophem, Hans, & Hartog, Joop. 2011. Unobserved Heterogeneity and Risk in Wage Variance: Does Schooling provide Earnings Insurance? Tinbergen Institute Discussion Papers 11-045/3. Tinbergen Institute.

Pekkarinen, Tuomas, Uusitalo, Roope, & Kerr, Sari. 2009. School tracking and intergenerational income mobility: Evidence from the Finnish comprehensive school reform. Journal of Public Economics, 93(7-8), 965–973.

Roy, A. 1951. Some Thoughts on the Distribution of Earnings. Oxford Economic Papers, 2(3), 135.

Suhonen, Tuomo, Pehkonen, Jaakko, & Tervo, Hannu. 2010 (December). Estimating regional differences in returns to education when schooling and location are determined endogenously. Working paper 363. University of Jyväskylä.

Uusitalo, Roope. 1999. Return to education in Finland. Labour Economics, 6(4), 569– 580.

Vella, Francis. 1998. Estimating Models with Sample Selection Bias: A Survey. Journal of Human Resources, 33(1), 127–169.