Question

Discuss pros and cons of using twins to estimate the rate of return to school

Answer 1

Hi,

Through using twin data to account for missed ability and family impact, we find that much of the OLS model's predicted return to education is primarily due to the effects of unobserved ability or family history. In other words, our results indicate that education's selection function is more important than the acquired information at school. The projected fixed effects of returning to one year of education are just 2.7%, and the portion of the education premium attributed to non-observable ability is as high as 5.7%. Our sensitivity analyzes suggest that the calculations inside the twin are biased downward due to measurement error, and if we subsequently correct this bias, the expected return rises to 3.8%.

In fact, the returns to the various levels of education are different, and in particular, we find that exam-oriented high school education has no return in terms of earnings; rather, it may merely serve as a selection mechanism for schools. Few previous studies have paid attention to the method of exam-oriented education and its effects on return to school.

(A) Pros of using twins to estimate the rate of return to school are as under:

1. Earnings can be described as a feature of schooling, this gives valuable insight to politicians about how to invest in education. When twins are highly dependent on being apart and will be depressed, it is best to hold them together. As a result, the rate of return improves.

2. Twins settle in school much quicker if they are kept together. If they want to be together, the benefits of having them in the same class are obvious.

3. If twins clear the exams then the rate of return is higher which directly increase the earning of schools. Primary education will now produce the greatest return on education; this is a change in traditional wisdom.

(B) Cons of using twins to estimate the rate of return to school are :

1. The schooling-earnings relationship does not necessarily mean causality.

2. Earnings functions include private returns for childcare, while government / public expenses and other benefits are necessary to estimate the social return values.

3. As economies become more competitive and technological advances alter the demand for education, cross-sectional data from decades may not be insightful on returns to current investment decisions.