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.