Returns to Education <strong>and</strong> ExperienceWith<strong>in</strong> the EU: An Instrumental Variable Approach for Panel Data 91Fig. 1. Earn<strong>in</strong>gs experience pr<strong>of</strong>iles for the three sample countriesgeneral, found to be higher for wage earners, which can be <strong>in</strong>terpreted as an <strong>in</strong>dication <strong>of</strong>the relevance <strong>of</strong> the signall<strong>in</strong>g role <strong>of</strong> education <strong>in</strong> determ<strong>in</strong><strong>in</strong>g earn<strong>in</strong>gs. This latter resultwas expected, bear<strong>in</strong>g <strong>in</strong> m<strong>in</strong>d the prevalent wage rates <strong>in</strong> the EU countries, where earn<strong>in</strong>gsare usually l<strong>in</strong>ked to the education level atta<strong>in</strong>ed by the worker. Second, accord<strong>in</strong>g to theevidence shown by the earn<strong>in</strong>g-experience pr<strong>of</strong>iles, which tend to be steeper <strong>in</strong> the case <strong>of</strong>the self-employed, traits <strong>of</strong> competitiveness can be discerned, with little or no evidence <strong>of</strong>imperfections.
92Advances <strong>in</strong> Econometrics - <strong>The</strong>ory <strong>and</strong> Applications6. Conclusions<strong>The</strong> aim <strong>of</strong> this Chapter has been to extend the exist<strong>in</strong>g research on the returns to humancapital accumulation that differentiates between the self-employed <strong>and</strong> wage earners. Thishas been carried out by provid<strong>in</strong>g evidence <strong>in</strong> a cross-country framework us<strong>in</strong>g ahomogenous database, which mitigates the problems associated with the existence <strong>of</strong>different data sources across countries, by us<strong>in</strong>g a panel data approach that is useful <strong>in</strong>deal<strong>in</strong>g with endogeneity <strong>and</strong> selectivity biases, as well as unobserved heterogeneity, <strong>and</strong>by apply<strong>in</strong>g an efficient estimation method that allows for the correlation between<strong>in</strong>dividual effects <strong>and</strong> time-<strong>in</strong>variant regressors, <strong>and</strong> that avoids the <strong>in</strong>security associatedwith the choice <strong>of</strong> the appropriate <strong>in</strong>struments.Information from the ECHP for the period 1994-2000 has been used, allow<strong>in</strong>g us to apply anEfficient Generalised Instrumental Variable estimator that provides consistent estimates <strong>of</strong>the rates <strong>of</strong> return to education <strong>and</strong> experience. Education has been represented bydummies <strong>of</strong> qualification levels (primary, secondary <strong>and</strong> higher), <strong>and</strong> experience has beenmeasured as the difference between the current age <strong>and</strong> the age <strong>of</strong> <strong>in</strong>itiation at work. <strong>The</strong>results have been presented <strong>in</strong> a reduced form, with the aim be<strong>in</strong>g to provide bothcomparisons across countries about the earn<strong>in</strong>gs differentials between the two employmentstatuses analyzed, <strong>and</strong> evidence as to whether such differences are consistent with thepredictions <strong>of</strong>fered by a variety <strong>of</strong> theoretical models.<strong>The</strong> self-employed have been used as a control group to help <strong>in</strong> assess<strong>in</strong>g the true impact <strong>of</strong>credentials achieved <strong>in</strong> the process <strong>of</strong> wage determ<strong>in</strong>ation, as well as <strong>in</strong> determ<strong>in</strong><strong>in</strong>g whichtype <strong>of</strong> theoretical structure underlies labour market behavior. We have operated under thepremise that, on the basis that signall<strong>in</strong>g is <strong>of</strong> much less importance for the self-employed,compar<strong>in</strong>g across both types <strong>of</strong> employment statuses should show that, for the sort<strong>in</strong>ghypothesis to be accepted, returns to education for wage earners are significantly higherthan those for the self-employed, as well as possibly <strong>in</strong>creas<strong>in</strong>g <strong>in</strong> a non-l<strong>in</strong>ear way.Similarly, most labour market models based on imperfect <strong>in</strong>formation predict steeperexperience-earn<strong>in</strong>gs pr<strong>of</strong>iles for wage earners, whereas competitive traits <strong>in</strong> the labormarket would imply similar or flatter pr<strong>of</strong>iles for this category <strong>of</strong> worker.<strong>The</strong> evidence that emerges for the sample countries tends to support the view that signall<strong>in</strong>gtheory is <strong>in</strong>deed relevant <strong>in</strong> determ<strong>in</strong><strong>in</strong>g <strong>in</strong>dividual earn<strong>in</strong>gs, <strong>in</strong> that, first, returns toeducation are lower where signall<strong>in</strong>g is expected to play a less important role, i.e. <strong>in</strong> the case<strong>of</strong> the self-employed, <strong>and</strong>, second, certa<strong>in</strong> non-l<strong>in</strong>earities appear. Furthermore, earn<strong>in</strong>gsexperiencepr<strong>of</strong>iles are found to be steeper for the self-employed <strong>in</strong> the long-run, <strong>in</strong>dicat<strong>in</strong>ga certa<strong>in</strong> significance <strong>of</strong> competitiveness <strong>in</strong> the labour markets.Some aspects <strong>of</strong> the <strong>in</strong>vestigation have been omitted or require further attention. We areconscious that selectivity issues should be carefully dealt with, when the development <strong>of</strong> areliable <strong>in</strong>strument makes this possible (Semyk<strong>in</strong>a & Wooldridge, 2010). Furthermore,obta<strong>in</strong><strong>in</strong>g structural estimates for the returns to education <strong>and</strong> experience would probablyrequire dynamic programm<strong>in</strong>g models <strong>of</strong> occupational choice (Belzil & Hansen, 2002).F<strong>in</strong>ally, the availability <strong>of</strong> richer panel data sets is <strong>of</strong> particular importance to control for themovements <strong>in</strong>to <strong>and</strong> out <strong>of</strong> self-employment. <strong>The</strong>se topics are all matters for future research,<strong>and</strong> will undoubtedly be helpful <strong>in</strong> carry<strong>in</strong>g out a more <strong>in</strong>-depth <strong>in</strong>vestigation <strong>in</strong>to thebehaviour <strong>of</strong> the labour market <strong>and</strong> wage determ<strong>in</strong>ation <strong>in</strong> the EU countries, <strong>in</strong> such a waythat we can more fully assess their degrees <strong>of</strong> competitiveness.
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