Education Policy Reform and the Return to Schooling from Instrumental Variabes

Abstract

We exploit an unusual policy reform which had the effect of reducing the direct cost of schooling in Ireland in the early 1970's. This gave rise to an increased level of schooling but with effects that vary across family background. This interaction generates a set of instrumental variables which we use to estimate the return to schooling allowing for the endogeneity of schooling. We find a large and well determined in the rate of return of the order of 11 or 12% substantially higher than the OLS estimates of around 7%.