UCSD ECON 139 - ECON 139 set 7 (16 pages)

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ECON 139 set 7

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ECON 139 set 7


Lecture number:
Lecture Note
University of California, San Diego
Econ 139 - Labor Economics

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ECON 139 SP 15 Antonovics 7 5 12 15 1 May 12th 2015 Do Workers Maximize Lifetime Earnings If we solve the ability bias problem we can learn the return to schooling on average by how much do earnings increase when schooling increases by 1 year However this doesn t tell us whether any given individual s choices are optimal because of selection bias The idea of selection bias is that there is heterogeneity in the returns to a college degree And it s never possible to observe an individual s returns since you never observe what he she would have earned if he she had made a different education choice Selection Bias For example suppose ability is multidimensional Paul is a good plumber but would make a lousy manager Marvin is a good manager but would make a lousy plumber You need a college degree to be a manager but not a plumber Suppose that Marvin goes to college but Paul does not Did they each make the right educational choice Page 1 of 16 Observed college wage differential WM WP Understates wage gain for Marvin Overstates wage gain for Paul Both may be making the right schooling choice but it s hard to know using the observed college wage differential In the model we just examined workers who were relatively good at one type of job were relatively bad at the other type of job Contrast this with ability bias in which ability is one dimensional Empirical work that attempts to correct for selection bias tends to find that people do make the right educational decisions Social Standpoint How much education is optimal from a social standpoint Concern motivated by 3 observations 1 American workers are facing increasing competition from workers in other countries 2 New technologies have increased the demand for workers with high levels of cognitive ability 3 Although Americans spend as much per pupil as other industrialized countries on education American students consistently score below students in other countries Why Does Schooling Increase Wages Two main theories 1 Human

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