Unobserved Ability Research Articles

What makes entrepreneurship counter-cyclical? Evidence from a shutdown of start-up subsidies in Denmark

ABSTRACT This paper examines how the presence of startup subsidies to the unemployed influences the relationship between business cycle and entrepreneurial activity, and the implications on individuals’ long-term earnings. We propose that on one hand, this measure fosters entrepreneurship, especially during recessions, by attracting individuals facing labour market constraints. On the other hand, the policy may unintentionally penalize counter-cyclical founders back to paid jobs if employers perceive them as less committed or of lower quality. Exploiting a change in Danish policy that abolishes a startup subsidy scheme for the unemployed, we compare the entrepreneurial population in two extended periods. Our findings indicate that entrepreneurship tends to be counter-cyclical during the subsidy period (1988–1996), while pro-cyclical in the post-reform period (1998–2006). Moreover, the results highlight an unintended consequence of the policy, i.e. a persistent and large (post-exit) wage gap between counter-cyclical and pro-cyclical founders, particularly pronounced for individuals with lower education, unobserved ability, and part-time job experience prior to transition.

Can Education Reduce or Mitigate Discrimination? An Investigation on Earnings of PhD Recipients in the US

<p class="MsoNormal" style="margin-top: 12pt; text-align: justify;"><span lang="EN-US" style="font-family: 'times new roman', times, serif; font-size: 14pt;">Spence’s signaling model (Spence, 1973) suggests that education can signal workers’ unobserved ability to employers thereby mitigating discrimination. There have been several studies concerning education’s impact on labor market discrimination against minority or disadvantaged groups. Our approach in this inquiry is unique in that we utilize the data of PhD recipients, a group of people with the highest education attainment, to test Spence’s theory. Another novelty of this paper is that in addition to examining possible discrimination against women and foreign-born, as has been done in previous studies, we further explore possible discrimination against the physically challenged individuals. Our baseline results show conflicting results that Ph.D. education can reduce discrimination against disability and foreign-born but not against gender. Further analysis by the Blinder-Oaxaca Decomposition shows that the wage gaps of gender and disability come more from the unobserved part than the explained part, while the foreign-born wage gap come more from the observable human capital differences. Since prejudice is an unobserved factor and we know that the disadvantaged groups are likely to suffer from prejudice (Oaxaca, 1973; Blinder, 1973; Montes-Rojas et al., 2017; Deshpande and Khanna, 2018), we conjecture that prejudice might be attributable to the unexplained part of the wage gaps. Furthermore, prejudice might be deeply rooted in one’s mind, thus difficult to remove even with the influence of education. Hence, our results reveal that it would be hard for Ph.D. education to eradicate the discrimination against gender and disability, but not against foreign-born.</span></p>

Revisiting Returns to Education in Thailand: Structural Causal Model Framework

This paper revisits the causal relationship between education and earnings, or the returns to education, using Thailand’s socio-economic household survey data. We show that, with the minimum modeling assumption, the causal effect of education on earnings can be nonparametrically identified only when there is no unobserved ability affecting both education and earning, and when the selection mechanisms are conditionally independent to earnings conditioning on potential experience and education. The causal effects of education on earnings are estimated using a nonparametric approach with selection bias adjustment and parametric approaches with selection bias and ability bias adjustments. The results show different estimates for returns to education across model specifications, indicating the importance of the bias adjustments and parametric assumptions.

Approaches to learn about employer learning

AbstractThe empirical literature on employer learning assumes that employers learn about unobserved ability differences across workers as they spend time in the labour market. This article describes testable implications that arise from this basic hypothesis and how they have been used to quantify the contribution of job market signalling and human capital in measured returns to education. While the empirical basis is still thin, the results suggest that signalling contributes at most about 25% to the observed returns to education.

Sources of Wage Growth

This paper investigates the sources of wage growth over the life cycle, determined by sectoral and firm mobility, unobserved ability, the accumulation of cognitive-abstract or routine-manual skills, and whether workers enroll in vocational training at the start of their career. Our analysis uses longitudinal administrative data over three decades and shows that routine-manual skills drive early wage growth, while cognitive-abstract skills become more important later. Moreover, job amenities are an important determinant of mobility decisions. Vocational training has long-term effects on career outcomes through various channels and generates returns for both the individual and society.

The urban wage premium and spatial sorting on observed and unobserved ability

Abstract We estimate static and dynamic agglomeration effects on earnings among university graduates using Swedish longitudinal population register data. The prime interest lies with whether and how the dynamic effects of big city work experience vary by observed ability of workers and whether the effects are portable after relocation. Urban wage premium and spatial sorting of university graduates are analysed by using information on school grades, parental education and university rank. We find that the value of accumulated big city work experience increases with observed ability. The dynamic premium of working in bigger cities is not lost when moving to smaller cities, suggesting that it reflects learning effects and human capital accumulation. Our findings indicate systematic spatial sorting on observed indicators of ability as well as on unobserved productive traits. Sorting on unobserved abilities is driven primarily by graduates in the upper part of the observed ability distribution and is apparent also when taking dynamic learning effects into consideration.

Survey Response Behavior as a Proxy for Unobserved Ability: Theory and Evidence

An emerging literature is experimenting with using survey response behavior as a proxy for hard-to-measure abilities. We contribute to this literature by formalizing this idea and evaluating its benefits and risks. Using a standard and nationally representative survey from Australia, we demonstrate that the survey item-response rate (SIRR), a straightforward summary measure of response behavior, varies more with cognitive than with noncognitive ability. We evaluate whether SIRR is a useful proxy to reduce ability-related biases in a standard economic application. We show empirically that SIRR, although a weak and imperfect proxy, leads to omitted-variable bias reductions of up to 20%, and performs better than other proxy variables derived from paradata. Deriving the necessary and sufficient conditions for a valid proxy, we show that a strong proxy is neither a necessary nor a sufficient condition to reduce estimation biases. A critical consideration is to which degree the proxy introduces a multicollinearity problem, a finding of general interest. We illustrate the theoretical derivations with an empirical application.

Dynamic treatment effects of job training

SummaryThis paper estimates the dynamic returns to job training. We posit a model of sequential training participation, where decisions and outcomes depend on observed and unobserved characteristics. We analyze different treatment effects, including policy relevant parameters, and link them to continuation values and latent skills. The empirical analysis exploits administrative data combining job training records, matched employee‐employer information, and pre‐labor market ability measures from Chile. Although the average returns to training are small, these vary across the unobserved ability distribution and previous training choices. In fact, among young workers, the returns to training are lower when followed by additional training, providing evidence of dynamic substitutability. Policy experiments illustrate how increasing the local availability of training programs may affect earnings heterogeneously across dynamic responses.

Does learning longer improve student achievement? Evidence from online education of graduating students in a high school during COVID-19 period

This paper examines the effect of online learning time on graduating students' test scores in a senior high school. Decisions regarding online education, including those related to participation and learning hours, are endogenous due to both reverse causality and omitted variables. This paper is the result of the natural experiment of the outbreak of COVID-19, which made every student to participate in online education when the spring semester began. In addition, this paper uses a value-added model controlling for the scores that preceded online education, which is a sufficient statistic of students' unobserved ability and motivation. If this cannot completely eliminate the endogeneity problem, it should be able to largely alleviate the problem. The results indicate that: online education has positive but limited impacts on test scores on average, particularly those in the subject of math within the natural sciences track; top-tier students are most positively affected by online education; and the benefits of online education vary among students with different backgrounds. The quantile regression suggests that a 10% increase in online education time raises math test scores by more than 0.25 for the students between the 0.60th and 0.80th quantiles. Surprisingly, it is evident that online learning time has a significant negative effect for some students in certain subjects. Finally, online education neither widens nor narrows the inequality of students' test scores.

Financial Designations: Possible Gateways to CFP® Education for Diverse Professionals?

This study found a robust case for promoting specific financial designations before attempting the Certified Financial PlannerTM (CFP®) education to improve diversity in the financial planning profession. Financial designations are lower-cost and shorter (taking just 3-4 months to complete) than the CFP® education program, which typically takes at least one year to complete before attempting the CFP® exam. Yet, the study found that higher grades in financial designation courses predicted higher grades in the CFP® education program, with significant and surprising differences in diversity statistics. For example, the College for Financial Planning’s financial designation course Foundations in Financial PlanningSM (FFPN) enrolled far more women than men. Knowing that better grades in designation programs, such as FFPN, can predict better performance in the CFP® education program can provide self-doubting students a high degree of confidence. One weakness of this study was the presence of unobserved ability of the students, in that students who performed better would do better in any program regardless. However, the study still has high predictive power, telling us that all students, irrespective of gender or race, who do well while testing the waters” in a designation program are likely to do well in the CFP® education program. Encouraging women and people of color to pursue a professional designation could lead to more women and people of color entering the CFP® education program and ultimately joining the ranks of CFP® certificants

Signaling and Discrimination in Collaborative Projects

We propose a model of collaborative work in pairs. Each potential partner draws an idea from a distribution that depends on their unobserved ability. The partners then choose to combine their ideas, or work separately. These decisions are based on the intrinsic value of their projects, but also on signaling payoffs, which depend on the public’s assessment of individual contributions to joint work. In equilibrium, collaboration strategies both justify and are justified by public assessments. When partners are symmetric, equilibria with symmetric collaborative strategies are often fragile, in a sense made precise in the paper. In such cases, asymmetric equilibria exist: upon observing a collaborative outcome, the public ascribes higher credit to one of the partners based on payoff-irrelevant “identities.” Such favored identities do receive a higher payoff relative to their disfavored counterparts conditional on collaborating, but may receive lower overall expected payoff. Finally, we study a policy that sometimes (but not always) clarifies the ordinal ranking of partners’ contributions, and find that such disclosures can be Pareto-improving and reduce the scope for discrimination across payoff-irrelevant identities.

The Return to Education in the Mid-Twentieth Century: Evidence from Twins

What was the return to education in the United States at mid-century? In 1940, the correlation between years of schooling and earnings was relatively low. In this article, we estimate the causal return to schooling in 1940, constructing a large linked sample of twin brothers to account for differences in unobserved ability and family background. We find that each additional year of schooling increased labor earnings by approximately 4 percent, about half the return found for more recent cohorts in twins studies. These returns were evident both within and across occupations and were higher for sons from lower socio-economic status families.

Human γS-Crystallin-Copper Binding Helps Buffer against Aggregation Caused by Oxidative Damage.

Divalent metal cations can play a role in protein aggregation diseases, including cataract. Here we compare the aggregation of human γS-crystallin, a key structural protein of the eye lens, via mutagenesis, ultraviolet light damage, and the addition of metal ions. All three aggregation pathways result in globular, amorphous-looking structures that do not elongate into fibers. We also investigate the molecular mechanism underlying copper(II)-induced aggregation. This work was motivated by the observation that zinc(II)-induced aggregation of γS-crystallin is driven by intermolecular bridging of solvent-accessible cysteine residues, while in contrast, copper(II)-induced aggregation of this protein is exacerbated by the removal of solvent-accessible cysteines via mutation. Here we find that copper(II)-induced aggregation results from a complex mechanism involving multiple interactions with the protein. The initial protein-metal interactions result in the reduction of Cu(II) to Cu(I) with concomitant oxidation of γS-crystallin. In addition to the intermolecular disulfides that represent a starting point for aggregation, intramolecular disulfides also occur in the cysteine loop, a region of the N-terminal domain that was previously found to mediate the early stages of cataract formation. This previously unobserved ability of γS-crystallin to transfer disulfides intramolecularly suggests that it may serve as an oxidation sink for the lens after glutathione levels have become depleted during aging. γS-Crystallin thus serves as the last line of defense against oxidation in the eye lens, a result that underscores the chemical functionality of this protein, which is generally considered to play a purely structural role.

Returns to education among the informally employed in Thailand

Thailand experienced rapid economic development and made significant investments in education over the past four decades; however, more than half of Thai workers remain informally employed. Despite the prevalence and persistence of informal work in Thailand, little is known about the returns to investments in formal education among informal workers. Using individual‐level data from the 2011, 2013, and 2015 Thailand Household Socio‐economic Surveys, this study estimates the wage returns to years of education for informal workers using an instrumental variable (IV) approach to correct for potentially biased coefficient estimates on years of education due to unobserved ability. Contrary to expectations, informally employed Thai workers find substantial returns to investments in formal education. The results under the IV approach indicate that the return to an additional year of education for the informally employed is 11–12 per cent, compared to almost 15 per cent for formally employed private firm workers.

Estimating Private School Premium for Primary School Children in Ethiopia: Evidence from Individual-level Panel Data

This article presents the first value-added model of private school effect in Ethiopia, using the unique Young Lives longitudinal data. I found a substantial and statistically significant private school premium (about 0.5 standard deviation) in Maths, but not in Peabody Picture Vocabulary Test (PPVT). Private school premium works for both low and high ability children. The results are robust to sorting on unobserved ability, grouping on lag structures and transfer between private and public schools. Combined with available contextual data, empirical evidence suggests that the effectiveness of private primary schools may be due to more learning time and teacher’s attention enjoyed by students. I also attempted to contribute methodologically to the literature by directly testing the structural assumption underpinning value-added models.

The Great Proletarian Cultural Revolution, Disruptions to Education, and the Returns to Schooling in Urban China

In determining whether a country's higher education system should be expanded, it is important for policymakers first to determine the extent to which high private returns to post-secondary education are an indication of the scarcity of graduates instead of the high unobserved ability of students who choose to attend post-secondary education. To this end, the paper identifies the returns to schooling in urban China using individual-level variation in educational attainment caused by exogenous city-wide disruptions to education during the Cultural Revolution from 1966 to 1976. For city-cohorts who experienced greater disruptions, children's educational attainment became less correlated with that of their fathers and more influenced by whether their fathers held administrative positions. The analysis calculates returns to college education using data from the China Urban Labor Survey conducted in five large cities in 2001. The results are consistent with the selection of high-ability students into higher education. The analysis also demonstrates that these results are unlikely to be driven by sample selection bias associated with migration, or by alternative pathways through which the Cultural Revolution could have affected adult productivity.

Estimating Private School Effects for School Children in Peru: Evidence from Individual‐level Panel Data

AbstractThis paper presents the first value‐added model of private school effects in Peru, using the unique Young Lives longitudinal data. Raw differences in test scores show that children in private schools have higher test scores in both maths and Peabody Picture Vocabulary Test for the most part. Estimates from ordinary least squares regression also indicate the existence of private school premium in maths. However, when we controlled for prior achievement, we find no private school effects in learning. These results hold true for both low‐ability and high‐ability children and are robust to sorting on unobserved ability, grouping on lag structures and transfer between private and public schools. © 2019 John Wiley & Sons, Ltd.

Parental Credit Constraints and Child College Attendance

Parents in the United States frequently supplement the student loans available to their children by cosigning on a loan, borrowing against their home equity, or with unsecured debt in their own names. This paper investigates whether some students are constrained from attending and completing college by their parents’ lack of access to credit markets by linking individual parental credit scores to their children's educational attainment. I find that good parental credit significantly improves the child's probability of attending college. Suggestive evidence is provided that the estimated relationship may be causal and not biased by omitted factors, such as unobserved ability or other personality characteristics.

The effects and challenges of vocational training in Korea

ABSTRACTThis paper explores whether training programs were effective in improving labor market performance of individuals, in particular wages and employment probability, in South Korea. The regression analyses using the data from Korean respondents in the Program for the International Assessment of Adults Competencies (PIAAC) survey show the strong positive effects of vocational training programs on earnings as well as on employment probability of individuals, while controlling for education, experience, and literacy skills as a proxy for unobserved ability, as well as occupation and industry. Moreover, the effects of job-training tend to be larger in older cohorts. These results suggest that against challenges posed by rapidly aging population and emergence of technological breakthroughs, Korea should promote vocational training activities and life-long learning programs, especially to the elderly.

Observed Scores as Matching Variables in Differential Item Functioning Under the One‐ and Two‐Parameter Logistic Models: Population Results

We derive formulas for the differential item functioning (DIF) measures that two routinely used DIF statistics are designed to estimate. The DIF measures that match on observed scores are compared to DIF measures based on an unobserved ability (theta or true score) for items that are described by either the one‐parameter logistic (1PL) or two‐parameter logistic (2PL) item response theory (IRT) model. We use two different weighting schemes (uniform weights and item discrimination weights) to construct the observed score matching variable. Our results show that (a) under the 1PL item response model, the observed score‐based DIF measures always approximate the true score‐based DIF measures very closely; (b) under the 2PL model, when the observed score is the simple sum score, the observed score‐based DIF measures underestimate or overestimate the true score‐based DIF measures under the null hypothesis of no DIF when the groups are different in ability, and this bias is related to the degree to which the average discrimination parameter underestimates or overestimates the studied discrimination parameter; and (c) under the 2PL model, when the item discrimination weights are used to define the observed score, the observed score‐based DIF measures always approximate the true score‐based DIF measures very closely. These results will hold for any sets of item responses that are described by either the 1PL or 2PL IRT model.