Actual and Potential Returns to Schooling in Spain

Abstract

The returns to formal schooling in Spain are estimated in this paper. The main difference between this and previous papers on this subject is that, here, a distinction is made between the increase in the worker’s potential maximum wage due to schooling and the actual registered increase. This difference (or underpayment) can be justified on the basis of job search theory. We use the stochastic frontiers technique because it allows the estimation of variables (such as the potential wage) that cannot be directly observed. One of the main results of this paper is that formal schooling clearly increases a worker’s potential maximum wage. This increase is particularly noticeable for those workers who have completed at least a five‐year university program. It has also been estimated that schooling increases the degree of underpayment, which is also quite relevant in the case of long‐term university education. In spite of this, the effect of formal schooling on actual wages is clearly positive.