Current earnings, persistence and schooling returns

Abstract

PurposeThe aim is to study the impact of schooling on between-groups wage inequality beyond the lens of the standard approach in the literature.Design/methodology/approachSimple econometric theory is used to make the main point of the paper. Supporting empirical evidence is also presented.FindingsDisregarding the persistence of current earnings implies a bias in the estimation of the wage return to schooling both at labour-market entry and in the rest of the working life.Research limitations/implicationsThe use of current earnings as a dependent variable in wage-schooling models may be problematic and requires specific handling.Social implicationsThe impact of schooling on the between-groups dimension of wage inequality may be different than previously thought.Originality/valueThe paper is the first to show that, when current earnings are used as a dependent variable, the identification of a wage-schooling model with the standard (time-invariant external instrument-variable) approach may lead to misleading conclusions.