Estimating the Economic Returns to Schooling: Restricted Maximum Likelihood Approach

The economic returns to schooling is a fundamental parameter of interest in many different areas of economics and public policy. The most common technique for estimating this parameter is based on the assumption that the ‘true’ coefficient of education in the earnings equation is constant across individuals. However, this may not often be wholly true and returns to schooling estimates may be biased and inconsistent.

Agyeman, A.; Nsowah-Nuamah, N.

2017

English

The economic returns to schooling is a fundamental parameter of interest in many different areas of economics and public policy. The most common technique for estimating this parameter is based on the assumption that the ‘true’ coefficient of education in the earnings equation is constant across individuals. However, this may not often be wholly true and returns to schooling estimates may be biased and inconsistent. The objective of this study was to estimate the returns to schooling as a random coefficient and obtain accurate and reliable estimates that will be useful for policy recommendations. The restricted maximum likelihood (REML) method was used to estimate the parameters of a random coefficient model using data from a 2007/2008 Ghanaian twins’ survey. The results revealed that the REML economic returns to schooling in three selected cities were between 7% and 9%. Significant (p<0.05) variances around the mean returns to schooling implied that returns to schooling might vary among individuals due to unobserved factors.

Agyeman, A., & Nsowah-Nuamah, N. (2017). Estimating the Economic Returns to Schooling: Restricted Maximum Likelihood Approach. STATISTIKA-STATISTICS AND ECONOMY JOURNAL, 97(1), 104-117.