Estimates of the effect of veteran status on civilian earnings may be biased
by the fact that certain types of men are more likely to serve in the armed
forces. In this paper, an estimation strategy is employed that enables
measurement of the effects of veteran status while controlling for differences in
other personal characteristics related to earnings. The randomly assigned risk
of induction generated by the Vietnam era draft lottery is used to construct
instrumental variables that are correlated with earnings solely by virtue of
their correlation with veteran status. Instrumental variables estimates
tabulated from Social Security Administration records indicate that in the early
1980's the earnings of white veterans were approximately 15 percent less than
nonveteran earnings. In contrast, there is no evidence that nonwhite veterans
suffered any lasting reduction in earnings. In an attempt to explain the loss of
earnings to white veterans, experience-earnings profiles are estimated jointly
with time-varying veteran status coefficients. The estimates suggest that the
effect of Vietnam era military service on white veterans is equivalent to a loss
of two years of civilian labor market experience.