Working Paper Series
On Omitted Variable Bias and Measurement Error in Returns to Schooling Estimates
Abstract: Lam and Schoeni (1993) consider an equation where earnings
are explained by schooling and ability. They assume that ability data are
lacking and that schooling is measured with error. The estimate obtained by
regressing earnings on schooling thus contains omitted variable bias (OVB),
which is positive, and measurement error bias (MEB), which is negative.
Adding a family background variable to proxy for ability is claimed to: i)
decrease the OVB towards, but not below, zero and ii) make the MEB even
more negative. This note claims that while ii) is true, even in the context
of multiple family background variables, i) is in general incorrect. The
OVB may increase in magnitude and/or change sign. Conditions are provided
under which i) holds. A simulation procedure is suggested that will yield
consistent estimates of the total bias and its components, conditional upon
values on the true return and the measurement error variance.
Keywords: Missing data; Proxy variables; Measurement error; Partial correlations; Simulations; (follow links to similar papers)
JEL-Codes: C13; C20; J31; (follow links to similar papers)
19 pages, March 5, 1998
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