published in: European Economic Review, 2010, 54 (4), 483-500
The decision to take more education is complex, and is influenced by individual ability,
financial constraints, family background, preferences, etc. Such factors, normally unobserved
by the researcher, introduce endogeneity and heterogeneity problems into estimating the
returns to education. In this paper, these problems are addressed by estimating a
comparative advantage model for schooling, in which the returns to education vary at
different levels of education. The model requires that instruments must be specified at each
level of education, and we suggest that different school reforms in Norway can serve as
suitable instruments. In particular, we exploit the staged implementation of a major reform in
the comprehensive school system in the 1960s. We find that the returns to education are
strongly nonlinear. In particular, we find that the returns to upper secondary school and
shorter programs at regional colleges, together with master’s programs at universities, have
high returns as measured by wages. Also, we find that the average treatment effect is
surprisingly high for medium-length educations (up to two years of college education). This
means that increasing the general level of education, which was the intention of the
comprehensive school reform of the 1960s and of other school reforms, has the potential to
generate a high return in wages, although we do not consider the cost to society. We also
find that there is a substantial difference between the average treatment effect and the effect
of treatment on the treated for bachelor’s and master’s degrees at universities.
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