The Benefits to Taxpayers from Increases in Students - RAND ...

Analytic Approach 15
effects of education on earnings capacity. All agree that increases in education resulted
in increases in earnings capacity. While the results differ slightly depending on the
approach and data, the common finding is that an additional year of schooling leads,
on average, to an increase of 7–10 percent in earnings capacity.
Card (1999) provides a thorough review of related economics literature, focusing
on models and estimation results from several different estimation approaches. He also
finds that studies generally agree that education has a positive causal effect on earnings
capacity. In a separate, more recent review of the benefits of education, Krueger and
Lindahl (2001) conclude that each additional year of schooling appears to raise earnings
capacity by about 10 percent.
Calculations of the effect of education level on earnings capacity have been challenged
on the grounds that the calculations are biased. Specifically, some critics maintain
that individuals with greater ability (e.g., because of greater intelligence or more
aggressive attitudes) choose to obtain more education, and so it is the fact that they have
greater ability in the first place, rather than their additional education, that accounts
for their higher earnings capacity. However, studies generally find a higher impact of
education on earnings capacity, instead of a lower one, when taking into account such
potential biases. These tests for causality include studies that include data on attitudes
and other factors that could influence earnings capacity and studies of twins and siblings
that completed different levels of education (Rouse, 2005). These studies find, for
example, that persons with high innate ability who terminate their education at a low
level, possibly because of family financial circumstances, do better in the labor market
than others with lesser ability who complete the same level of schooling. Conversely,
persons with low ability who drift through several levels of schooling tend to earn less
than others with higher ability who complete the same level of schooling. This strongly
suggests that education does have a causal effect on earnings capacity, whether we consider
personal ability or not.
Estimates of the effect of education level on earnings capacity, using “simple”
methods that do not take into account potential ability and background bias, range
from 2 to 11 percent greater earnings capacity per year of schooling and cluster around
7 percent. Estimates that take those biases into account find that each additional year
of schooling increases earnings capacity by 5 to 14 percent and cluster around 10 percent.
For example, Ashenfelter, Harmon, and Oosterbeek (1999) find a 6.6 percent
and 9.3 percent increase in earnings capacity using simple and advanced methods,
respectively.
Most of these studies that we reviewed were completed in the 1990s and used data
from the 1980s and 1990s. Because the differences in the wages and salaries paid to
persons with different levels of schooling have generally increased over time, these studies’
estimates understate the current effects of education level on earnings. Table 2.1
shows the ratios of median weekly earnings by educational attainment for men and