One of the best documented relationships in economics is the link between education and
income: higher educated people have higher incomes. Advocates argue that education provides
skills, or human capital, that raises an individual‘s productivity. Critics argue that the documented
relationship is not causal. Education does not generate higher incomes; instead, individuals with
higher ability receive more education and more income. This essay reviews the evidence on the
relationship between education and income. We focus on recent studies that have attempted to
determine the casual effect of education on income by either comparing income and education
differences within families or using exogenous determinants of schooling in what are sometimes
called “natural experiments.” In addition, we assess the potential for education to reduce income
disparities by presenting evidence on the return to education for people of differing family
backgrounds and measured ability.
The results of all these studies are surprisingly consistent: they indicate that the return to
schooling is not caused by an omitted correlation between ability and schooling. Moreover, we find
no evidence that the return to schooling differs significantly by family background or by the
measured ability of the student.

Year of Publication
Date Published
Publication Language
Citation Key
The Quarterly Journal of Economics, Vol. 115, No. 3, Aug.ust 2000
Ashenfelter, O., & Rouse, C. (1998). Schooling, Intelligence, and Income in America: Cracks in the Bell Curve. Retrieved from (Original work published 11/1998AD)
Working Papers

ln CPS data, the 20% of the civilian labor force with 1-3 years of college earn 15% more
than high school graduates. We use data from the National Longitudinal Study of the High School
Class of I972 which includes postsecondary transcript data and the NLS Y to study the distinct returns
to 2-year and 4-year college attendance and degree completion. Controlling for family income and
measured ability, wage differentials for both 2-year and 4-year college credits are positive and
similar. We find that the average 2-year and 4-year college student earned roughly 5% more than
similar high school graduates for every year of credits completed. Second, average bachelor and
associate degree recipients did not earn significantly more than those with similar numbers of college
credits and no degree, suggesting that the credentialling effects of these degree are small. We report
similar results from the NLSY and the CPS.
In addition to controlling for family background and ability measures, we pursue two IV
strategies to identify measurement error and selection bias. First, we use self-reported education as
an instrument for transcript reported education. Second, we use public tuition and distance from the
closest 2-year and 4-year colleges as instruments, which we take as orthogonal to schooling
measurement error and other unobserved characteristics of college students. Although research over
the past decade has been preoccupied with selection bias, the two biases roughly cancel each other,
suggesting that the results above are, if anything, understated.

Year of Publication
Date Published
Publication Language
Citation Key
American Economic Review, Vol. 83, No. 3
Kane, T., & Rouse, C. (1993). Labor Market Returns to Two- And Four-Year College: Is A Credit a Credit And Do Degrees Matter?. Retrieved from (Original work published 01/1993AD)
Working Papers