Does Measured School Quality Really Matter? An Examination of the Earnings-Quality Relationship

This paper examines the economic and empirical foundations of the aggregate evidence on the effect of schooling quality on earnings. A common framework is presented which nests all previous studies as special cases. We discuss two crucial identifying assumptions and test them. The first assumption is the absence of region of birth - region of resident interactions in the return to schooling. This rules out patterns of migration on the basis of realized earnings in the destination state. Both parametric and nonparametric versions of this hypothesis are tested. Using 1970, 1980 and 1990 Census data, it is decisively rejected. A second assumption is that log earnings equations are linear - or nearly linear in schooling. This assumption is false. We find that estimated earnings-quality relationships are sensitive to specification of the earnings function. When false linearity assumptions are relaxed, the only effect of measured schooling quality is on the returns for college graduates. The evidence for an aggregate earnings-quality relationship is weak once false empirical restrictions are relaxed.