Economic Returns to Schooling in Urban China: Ordinary Least Squares the Instrumental Variables Approach

Abstract

In this paper, we examine the economic returns to schooling in urban China by using ordinary least squares (OLS) and instrumental variables (IV) methodologies. First, we find that OLS estimates of the returns to education are lower in China than in other transition economies, whereas IV estimates are higher in China. Second, we find that OLS, a method for estimating the returns to education without controlling for endogeneity bias, may underestimate the true rates of return for men. In addition, if we do not control for the endogeneity and sample selection biases, we may further underestimate the true rates of return for women. Finally, we find that OLS estimates of the returns to education for men are slightly higher than those for women. The IV estimates for women are higher than those for men, and this difference increases after correcting for selectivity biases.