Although schooling and earnings are highly correlated, social
scientists have argued for decades over the causal effect of education. A
convincing analysis of the causal link between education and earnings
requires an exogenous source of variation in education outcomes. This
paper explores the use of college proximity as an exogenous determinant of
schooling. An examination of the NLS Young Men Cohort reveals that men who
grew up in local labor markets with a nearby college have significantly
higher education and significantly higher earnings than other men. The
education and earnings gains are concentrated among men with poorly-
educated parents -- men who would otherwise stop schooling at relatively
low levels. When college proximity is taken as an exogenous determinant of
schooling the implied instrumental variables estimates of the return to
schooling are 25-60% higher than conventional ordinary least squares
estimates.
Since the effect of a nearby college on schooling attainment varies by
family background it is possible to test whether college proximity is a
legitimately exogenous determinant of schooling. The results affirm that
marginal returns to education among children of less-educated parents are
as high and perhaps much higher than the rates of return estimated by
conventional methods.