Unobserved Ability, Comparative Advantage, and the Rising Return to Education in the United States: A Cohort-Based Approach

Abstract

This paper quantities the extent to which the rise in the measured return to education between I979 and 2000 is reflecting a change in the causal effect of education on labor market eamings. The conceptual issues are formalized in a two-factor model of ability. schooling and eamings that allows heterogeneity in absolute and comparative advantage across the population. ln particular, the framework implies that a rise in the true return to education will increase the degree of convexity of the relationship between eamings and years of education for a fixed cohort of individuals. Permanent differences in the levels of the eamings-schooling relationship across cohorts will arise if the mapping between schooling and ability differs across cohorts. These implications of the two-factor model allow the identification of changes in the causal effect of education over time and across cohorts.