Returning to school for higher returns

On the basis of those respondents in the National Longitudinal Survey of Youth (NLSY) who change jobs with an intervening period of education reinvestment, the conventional assumption of linearity of log wages in years of schooling is strongly rejected: a typical reinvestment for the 1980 through 1993 period is associated with a rise of about 3.5 percentage points in the estimated return to an additional year of schooling. The estimated marginal rate of return generally rises in the former education level, and reaches the maximum at 15 years of the former level (therefore 16 years of education after reinvestment), where an additional year of investment is associated with a rise in real hourly rate of pay by approximately 20%. Evidence also shows that, while the level of individuals’ risk tolerance affects significantly the probability of returning to school, correcting for sample selectivity makes little difference in the results. Findings in the current paper survive a variety of robustness tests. The current cohort-based evidence is more helpful than existing evidence from cross-sectional data to individuals making schooling decisions.

► We present longitudinal evidence of nonlinearity in the rate of return to education.
► The estimated return increases in years of education investment up to 16 years.
► Neither sheepskin effects nor sample selectivity is responsible for the finding.
► The current finding is not explained by concurrent technological change.
► Our cohort-based estimates are relevant for individuals making schooling decisions.