This paper uses a new survey to contrast the wages of genetically identical twins with different schooling levels. Multiple measurements of schooling levels were also collected to assess the effect of reporting error on the estimated economic returns to schooling. The data indicate that omitted ability variables do not bias the estimated return to schooling upward, but that measurement error does bias it downward. Adjustment for measurement error indicates that an additional year of schooling increases wages by 16%, a higher estimate of the economic returns to schooling than has been previously found.
(a) (20 Points) Suppose the true model for returns to education is: log(wagei) = β0 + β1Educationi + αi + ei , where αi is genetic ability. Using terms from lecture and chapters 13 and 14 in the text explain how this study could eliminate the ability bias. Demonstrate it mathematically. Explicitly state any assumptions necessary for this paper to correctly measure returns to education.
(b) (5 Points) Think about identification of their coefficient on education. How is variation in the education variable generated?
(c) (5 Points) Could the same estimating equation be used to estimate the difference in wages by race or gender? Explain.