Rate of Return on Education and Sample Selection Bias

By Bagheri, Fathollah; Kara, Orhan | Atlantic Economic Journal, September 2005 | Go to article overview

Rate of Return on Education and Sample Selection Bias


Bagheri, Fathollah, Kara, Orhan, Atlantic Economic Journal


The Mincerian method is extensively used to estimate rates of return on education investment, using survey data of household earnings and OLS. However, the estimated coefficients suffer from sample selection bias [Heckman, Econometrica, 1979]. The question is: Is there any difference in assessing returns on investment in education by paying attention to the sample selection bias or by ignoring it? See, for example, Psacharopoulos and Patrinos [Education Economics, 2004], Glewwe [JEL, 2002], Chase [Industrial and Labor Relations Review, 1998] and Lassibille [Economics of Education Review, 1998]. In this study, we use Household Expenditure Income Survey of Turkey (26,734 males and 7218 females) to assess sample selection bias in the estimates of investment return on education. Our data carry some bias because we only observe data on market wages when an individual chooses to enter the workforce. Dividing the workforce into wage earners and nonworkers is certainly not random; as a result the selected sample is biased.

We compare two sets of estimated rates of return to education in Turkey from the Mincerian augmented earnings function for each gender: one with 'sample selection correction' using Heckman's two-step method and one 'without correction.' The independent variables are various levels of education, ranging from no education to college graduates, experience, its square, and other variables. The estimated coefficients of education in all four models are statistically significant at I percent. The coefficient of the inverse Mills ratio in the corrected models is also statistically significant at 1 percent, lending support for the sample selection bias. However, the differences between the estimates of the coefficients with and without corrections are not dramatic. …

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