Returns to Education <strong>and</strong> ExperienceWith<strong>in</strong> the EU: An Instrumental Variable Approach for Panel Data 89the fixed effect estimator. A second Hausman test contrast<strong>in</strong>g the Hausman-Taylor aga<strong>in</strong>stthe fixed effects model (column H2), is useful <strong>in</strong> order to test the strict exogeneity <strong>of</strong> theregressors used as <strong>in</strong>struments <strong>in</strong> the Hausman-Taylor estimation. Once this secondHausman test has identified which regressors are strictly exogenous, they are then used as<strong>in</strong>struments <strong>in</strong> the Hausman-Taylor estimation.Compar<strong>in</strong>g the coefficients <strong>of</strong> Table 3 with those from the GLS estimation (not shown, butavailable from the authors upon request), we can note that the Hausman-Taylor estimationprovides coefficients <strong>of</strong> education <strong>and</strong> experience that, <strong>in</strong> general, are consistently muchhigher. This is <strong>in</strong> accordance with the typical f<strong>in</strong>d<strong>in</strong>g reported <strong>in</strong> the literature when us<strong>in</strong>g<strong>in</strong>strumental variables <strong>of</strong> upward bias <strong>in</strong> IV-type, compared to OLS-type estimations.Regard<strong>in</strong>g the returns to education, wages <strong>in</strong>crease with educational atta<strong>in</strong>ment, withreturns higher among wage earners <strong>in</strong> Germany <strong>and</strong> Italy <strong>and</strong> quite similar <strong>in</strong> the UK, <strong>and</strong>the coefficients for the self-employed with secondary education level <strong>in</strong> Germany <strong>and</strong> theUK are non-significant. <strong>The</strong> percentage changes across educational categories, computed asthe difference <strong>in</strong> the percentage change <strong>in</strong> wage for group i relative to the group i-1, e βi - e βi-1 ,where β i is the coefficient for the dummy variable for group I, show that returns <strong>in</strong>crease aswe move up the qualification ladder, especially from secondary to higher education, whichsupports a convex configuration <strong>of</strong> earn<strong>in</strong>gs on the returns to education, thus confirm<strong>in</strong>g theimportance <strong>of</strong> the sheepsk<strong>in</strong> effect. Both results, higher returns to education for paidworkers, <strong>and</strong> <strong>in</strong>creas<strong>in</strong>g non-l<strong>in</strong>earities <strong>in</strong> the relationship between wages <strong>and</strong> educationalatta<strong>in</strong>ment, <strong>in</strong>dicate some degree <strong>of</strong> a sort<strong>in</strong>g or signall<strong>in</strong>g role played by education.CountryGermanyItalyUnitedK<strong>in</strong>gdomLabourstatusSelfemployedWageearnersSelfemployedWageearnersSelfemployedWageearnersExp. Exp. 2 /1000.053**(3.72)0.065**(22.24)0.037**(6.30)0.047**(27.52)0.053**(5.16)0.063**(27.27)-0.068**(-2.83)-0.084**(-22.21)-0.053**(-4.66)-0.089**(-23.60)-0.055**(-3.41)-0.106**(-27.28)Second.education0.654(0.89)0.848**(8.83)0.339**(2.78)0.551**(15.09)0.629(0.74)0.524**(3.41)Highereducation1.243*(2.45)1.291**(17.31)0.631**(6.35)0.847**(19.07)0.714**(3.54)0.706**(15.14)H1234.96(0.0000)1117.89(0.0000)138.47(0.0000)2103.26(0.0000)275.90(0.0000)2064.11(0.0000)H28.44(0.9986)10.51(0.9921)34.66(0.0946)49.63(0.0752)5.92(0.9999)4.58(1.0000)Table 3 Estimated Coefficients <strong>of</strong> M<strong>in</strong>cerian Earn<strong>in</strong>gs Function by Hausman-Taylor. Notes:t-ratios between parentheses (p-values <strong>in</strong> H1 <strong>and</strong> H2). Both panels are unbalanced, s<strong>in</strong>ce theemployment status may vary across <strong>in</strong>dividuals over time. Controls used. Gender: 1 formale <strong>and</strong> 0 for female. Marital status: married, s<strong>in</strong>gle, divorced, widow or separated.Tra<strong>in</strong><strong>in</strong>g: if the worker has realized some course <strong>of</strong> occupational tra<strong>in</strong><strong>in</strong>g. Eight dummiesthat <strong>in</strong>dicate occupation. A dummy <strong>in</strong>dicat<strong>in</strong>g whether the <strong>in</strong>dividual works <strong>in</strong> the privateor the public sector. Dummies that <strong>in</strong>dicate seniority: less than two years, between 2 <strong>and</strong> 10years, <strong>and</strong> more than 10 years. Dummies that <strong>in</strong>dicate the year. * Significant at the 5% level.** Significant at the 1% level. H1 tests the r<strong>and</strong>om effects estimator aga<strong>in</strong>st the fixed effects.H2 tests the Hausman-Taylor estimator aga<strong>in</strong>st the fixed effects.
90Advances <strong>in</strong> Econometrics - <strong>The</strong>ory <strong>and</strong> ApplicationsAcross countries, experience <strong>in</strong>creases human capital accumulation dur<strong>in</strong>g the life cycle. Atfirst sight, returns to experience are greater for wage earners, even though they depreciate ata faster rate than <strong>in</strong> the case <strong>of</strong> the self-employed. In order to extract more robustconclusions, a series <strong>of</strong> <strong>in</strong>dicators are used. First, the maximum return, i.e. the po<strong>in</strong>t whereexperience ceases to add positively to earn<strong>in</strong>gs, which is def<strong>in</strong>ed by lnw/Exp fromearn<strong>in</strong>gs equation (3), that is to say, the number <strong>of</strong> years that equals 1 + 2 Exp/50 to 0provided 2
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