Question from Past Microeconomics Qualifying ExamEdit

Spring 2004 - Section I, Question three, George Mason University

State first whether the following statement is true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.

One reason that the econometrically estimated rate of return on education is biased downward is that more educated workers have safer jobs than less educated workers.


True/Uncertain. What "econometrically estimated rate of return"? Where is the model in question? Without knowing for what we are controlling and what we are not controlling, it's impossible to know in which direction the predicted rate of return is biased from the actual rate of return; many factors, not only a failure to control for job security, could be biasing the result in either direction.

In a naive model that does not control for job security and estimates a return to education based purely on cash plus easily priced benefits (such as insurance), the failure to control for job security -- considered in isolation from other potential biases -- would place a downward bias on the return. Employees would certainly be willing to pay for job security, and that amount should be considered in a consideration of the full economic return to education; by omitting it, we omit part of the benefit from education and thus make education look less valuable than it truly is.

FALSE:  The econometrically estimated rate of return on education is upward biased because it doesn't account for the cost of getting educated and the lost income while attending school (e.g. original estimate of ROR is 12.5%, but drops down to ~5% after adjusting for these factors).

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