For One More Year with You: Changes in Compulsory Schooling, - PowerPoint PPT Presentation

“For One More Year with You”: Changes in Compulsory Schooling, Education and the Distribution of Wages in Europe Margherita Fort Giorgio Brunello and Guglielmo Weber PRELIMINARY WORK European University Institute, Max Weber Post-Doctoral Programme Florence, January 18, 2007 – p. 1/31

Motivation Large literature on average returns to schooling Less is known on the heterogeneity of the returns Are returns lower or higher for individuals at the lowest quartile of the distribution of earnings? Florence, January 18, 2007 – p. 2/31

Are returns higher in the lowest quartile? Y = F ( A , E ) where: Y earnings; A ability; E education If ability and education are complements for individual productivity (and wages), the returns are lower for the less able ∂ ∂Y ∂ E > 0 ∂ A Florence, January 18, 2007 – p. 3/31

Motivation II Implications for education and inequality Do education reforms which affect compulsory years of education reduce or increase earnings inequality? Difficult question but relevant for policy Florence, January 18, 2007 – p. 4/31

Our Paper We study the effects of compulsory schooling reforms introduced in Europe in the 1960s and 1970s on the distribution of earnings. By exploiting the exogenous changes in education induced by the reforms, we assess the causal effect of education on the distribution of earnings for individuals whose schooling level changed due to the reforms ( compliers ) Florence, January 18, 2007 – p. 5/31

Outline of the Talk Education & Income: Association & Causality Moving On From Average Returns The Identification Strategy in a Nutshell Data Issues Preliminary Results (Intention-to-Treat Parameters) Florence, January 18, 2007 – p. 6/31

What the other have done Association U.S. : returns to education increase dramatically over the quantiles of the conditional distribution of wages [Buchinsky (2004)]; (ii) Europe: stronger education-related earnings increment for individuals who receive higher hourly wages conditional on their observed characteristics [Pereira & Martins (2004)] Florence, January 18, 2007 – p. 7/31

What the other have done Causality U.S. : ability & education act as complements in determining wages, after controlling for endogeneity [Arias et al. (2001), data on twins] UK: substitutability between education and cognitive & non-cognitive ability [Denny et al. (2004), controls for cognitive ability] Florence, January 18, 2007 – p. 8/31

Identification of Endogenous Quantile Treatment Effects (QTEs) Abadie et al. (2002): move from the approach of Angrist & et al. (1996); propose an IV estimation method for QTEs; application to JPTA Chesher (2003): discuss identification in recursive non linear structural model (based on exclusion restriction); estimation developed by Ma & Koenker (2004) (weighted average derivative estimators) and Arias et al. (2001) (control variate approach) Chernozhucov & Hansen (2005, 2006): propose an IV QTE model and estimation (analogue to two stage least squares estimator) Florence, January 18, 2007 – p. 9/31

Identification of Endogenous Quantile Treatment Effects (QTEs) (continued) Abadie et al. (2002): binary treatment, binary instrument setting; identification and estimation of QTEs for compliers ; authors do not consider estimation of the potential outcomes distributions for compliers Chesher (2003): continuous treatment variable & continuous instrument; identification and estimation of QTEs; ! Chesher (2005) extension to the case of a discrete treatment variable (interval identification) Chernozhucov & Hansen (2005, 2006): use of marginal independence conditions Florence, January 18, 2007 – p. 10/31

Main Features of This Project Identification: ( Fuzzy ) Regression Discontinuity Design (RDD) exploiting exogenous variation in schooling induced by school reforms rolled out in Europe in the 20th century. Data: European Community Household Panel (ECHP, 2001), International Social Survey Programme (ISSP, 1993-2002), Survey on Health Ageing and Retirement in Europe (SHARE, 2004) and OECD, ILO (participation and unemployment rates, time series by gender 1947-2005). Florence, January 18, 2007 – p. 11/31

The Identification Strategy in a Nutshell Hahn et. al.(2001), Card & Lee (2006), Imbens & Rubin (1997) Many European countries increased the minimum school leaving age (MSLA) in 1960s-1970s. Date of birth (randomly assigned) determines whether an individual had to stay longer in school. The causal effect of education of wages is identified for those individuals whose education changed due to the effect of changes in MSLA ( compliers ). The changes in wages experienced by these individuals are proportional to the causal effect of education on wages provided that (i) they cannot be explained by any other “event”, except the reform in MSLA; (ii) there are no defiers . Florence, January 18, 2007 – p. 12/31

Reforms in Minimum School Leaving Age (MSLA), Europe, 20th century 1st cohort Change in Country Reform affected MSLA yrs school. 13 → 15 7 → 9 Denmark 1971 1958 14 → 16 8 → 10 France 1959 1950 11 → 14 5 → 8 Italy 1963 1949 Also in Austria (1962), Belgium (1971), Finland (1970s), Germany (1960s), Greece (1975), Ireland (1972), the Netherlands (1975), Portugal (1960s), Spain (1970), Sweden (1962), UK (1946-1957). Positive effect on average years of schooling (+0.3) and imperfect compliance documented for several countries. Florence, January 18, 2007 – p. 13/31

Wish List (and “Bones of Contention”) A (sizeable) micro-data set on Pooling (surveys, countries) several European countries Comparable individuals Country specific institutional & around the cutoff point labour market features, age, period (businness cycle at entry and at the time wages are observed) Data quality Coding issues (wage, education); missing data Florence, January 18, 2007 – p. 14/31

Empirical Analysis Binary treatment: D ≡ 1 ( years of schooling ≥ compulsory years of schooling ) Binary instrument: Z ≡ 1 ( T ≥ 0 ) , T = cohort - ¯ c k , c k year in which the reform was introduced in coutry k ¯ • Countries with 1-2 years increase in MSLA : Austria, Denmark, France, Germany, Ireland, Netherlands, Portugal, Spain, Sweden • Countries with 3-4 years increase in MSLA : Belgium, Finland, Greece, Italy • Countries where the change in MSLA was introduced in the late’50- early ’60s : Austria, France, Germany, Italy, Portugal, Sweden Florence, January 18, 2007 – p. 15/31

Empirical Analysis Analysis limited to individuals aged more than 25 who are employed at the time of the interview, T ∈ [ − 9 , +9] , i.e. born between 1932 and 1975, aged between 25 and 67 at the time of the interview Dependent variable: logarithm of deflated (2000 prices) gross monthly earnings in purchaising power standards (PPSs) Controls ( X ): country & gender specific quadratic trend in T ; survey, country dummies; GDP per capita; employment protection legislation; unemployment rate at the (estimated) time of entry into the labour market and at the time the wage is observed; net wage dummy. Florence, January 18, 2007 – p. 16/31

Data: Summary Statistics on Key Variables n t ∀ t E [ Y ] E [ D ] n t ∀ t E [ Y ] E [ D ] N N A ∗ IR ∗ 2 , 153 150 1 , 736 0 . 8 2 , 436 130 1 , 679 0 . 9 B ∗ IT ∗ 1 , 505 70 2 , 174 0 . 8 3 , 528 200 1 , 709 0 . 8 N ∗ DK 3 , 006 170 2 , 630 0 . 9 3 , 857 200 2 , 019 0 . 9 FI PO ∗ 2 , 190 140 1 , 796 0 . 9 1 , 977 100 1 , 084 0 . 7 FR ∗ SP ∗ 2 , 162 120 2 , 158 0 . 9 3 , 775 200 1 , 615 0 . 8 GE ∗ SW 3 , 879 180 1 , 934 0 . 7 3 , 366 200 1 , 784 0 . 8 GR 1 , 399 70 1 , 223 0 . 8 Legend N sample size (employed individuals, T ∈ [ − 9 , + 9 ] ); n t sample size by T ; Y deflated (2000 prices) gross monthly earnings in PPSs, D ≡ 1 ( years of schooling ≥ compulsory years of schooling ) Florence, January 18, 2007 – p. 17/31

The Effect of MSLA Changes on Education E [ D | Z = 1 , X d ] − E [ D | Z = 0 , X d ]( s.e. ) Country group Features Males Females 1-2 years increase in MSLA & reform 0.03 (0.01) 0.01 (0.01) ( A , Dk , Fr , Ge , Ir , Ne , Po , Sp , Swe ) 3-4 years increase in MSLA & reform 0.06 (0.01) 0.05 (0.02) ( Be , Fi , Gr , It ) Employed 1-2 years increase in MSLA & reform 0.01 (0.01) 0.01 (0.01) ( A , Dk , Fr , Ge , Ir , Ne , Po , Sp , Swe ) 3-4 years increase in MSLA & reform 0.04 (0.02) 0.04 (0.02) ( Be , Fi , Gr , It ) Florence, January 18, 2007 – p. 18/31

The Effect of MSLA Changes on Education E [ D | Z = 1 , X d ] − E [ D | Z = 0 , X d ] Country group Features 1-2 years increase in MSLA & reform 0.02 (0.007) ( A , Dk , Fr , Ge , Ir , Ne , Po , Sp , Swe ) 3-4 years increase in MSLA & reform 0.05 (0.012) ( Be , Fi , Gr , It ) Employed 1-2 years increase in MSLA & reform 0.01 (0.009) ( A , Dk , Fr , Ge , Ir , Ne , Po , Sp , Swe ) 3-4 years increase in MSLA & reform 0.04 (0.015) ( Be , Fi , Gr , It ) Florence, January 18, 2007 – p. 19/31