Identifying and Estimating the Distributions of Ex Post and Ex Ante Returns to Schooling

Abstract

This paper surveys a recent body of research by Heckman (2001, 2003), ), Cunha, Heckman, and Navarro (2005a,b, 2006, Heckman and Navarro (2006) and Navarro (2004) that estimates and identifies the ex post distribution of returns to schooling and determines ex ante distributions of returns on which agents base their schooling choices. We discuss methods and evidence, and state a fundamental identification problem concerning the separation of preferences, market structures and agent information sets. For a variety of market structures and preference specifications, we estimate that over 50% of the ex post variance in returns to college are forecastable at the time agents make their schooling choices.JEL Code: C31

Do students expect compensation for wage risk?

“…Cunha et al (2005) and Cunha and Heckman (2007) promote this argument and present an econometric solution for the problem. They develop and apply a method for decomposing cross section variability of earnings into components that are forecastable at the time students decide to go to college (heterogeneity) and components that are unforecastable (risk).…”

“…Typically, the regression also contains a measure for the skewness Typically, the equation is estimated in two steps, with variance and skewness defined on the residuals (within occupations/educations) from an ordinary Mincer equation in the first stage and then added to a re-estimation in the second stage. The main criticism applying to this approach is that ex post wage realizations are not a valid proxy for the ex ante wage risk r i (and skewness s i ) faced by the agents (Cunha et al 2005;Cunha and Heckman 2007). Only part of the variance that can be found in actual wage data is due to risk, another part is due to worker heterogeneity.…”

AN ECONOMIC ANALYSIS OF IDENTITY AND CAREER CHOICE*

“…Although this framework incorporates an important determinant of educational choices, it leaves many questions unanswered, such as why individuals choose apparently di¢ cult and costly educations with low returns. One possibility is the existence of non-pecuniary bene…ts of education, whose importance for educational decision making has received increased recognition in economics during the last years (Arcidiacono, 2004;Cunha and Heckman, 2007).…”

“…The result of the sample selection is a more homogenous sample than in the original PISA, both in terms of educational path and parental background. 9 We use the high school sample for the factor analysis in section 6.1 since this will provide us with the clearest picture of the social categories that are relevant for this population.…”

“…is available in OECD (2002b), and the speci…c design for Denmark is described in AKF et al (2001). 9 The high school sample is also selective in the sense that it only includes individuals who participated both in the PISA survey in 2000 and in the follow-up survey in 2004. In addition, it only includes individuals who could be coupled with the register data.…”