In this paper we use data on brothers, and fathers and sons, to estimate the economic
returns to schooling. Our goal is to determine whether the correlation between earnings and
schooling is due, in part, to the correlation between family backgrounds and schooling. The
basic idea is to contrast the differences between the schooling of brothers, and fathers and sons,
with the differences in their respective earnings. Since individuals linked by family affiliation
are more likely to have similar innate ability and family backgrounds than randomly selected
individuals our procedure provides a straightforward control for unobserved family attributes.
Our empirical results indicate that in the sample of brothers the ordinary least squares
estimates of the return to schooling may be biased upward by some 25% by the omission of
family background factors. Adjustments for measurement error, however, imply that the
intrafamily estimate of the returns to schooling is biased downward by about 25% also, so that
the ordinary least squares estimate suffers from very little overall bias. Using data on fathers
and sons introduces some ambiguity into these findings, as commonly used specification tests
reject our simplest models of the role of family background in the determination of earnings.