Understanding the Role of Cognitive Ability in Accounting for the Recent Rise in the Economic Return to Education
This paper examines the contribution of the rise in the return to ability to the rise in the economic return to education. All of the evidence on this question comes from panel data sets in which a small collection of adjacent birth cohorts is followed over time. The structure of the data creates an identification problem that makes it impossible to identify main age and time effects and to isolate all possible age-time interactions. In addition, many education-ability cells are empty due to the stratification of ability with educational attainment. These empty cells or identification problems are literature and produce a variety of different estimates. We test and reject widely used linearity assumptions invoked to identify the contribution of the return to ability on the return to schooling. Using nonparametric methods find little evidence that the rise in the return to education is centered among the most able.
Meritocracy and Economic Inequality, Arrow, Kenneth, Samuel Bowles, and Steven Durlauf, eds., Princeton: Princeton University Press, 2000.