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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2011:17:
Increasing Returns to Schooling by Ability? A Comparison Between the US and Sweden

Martin Nordin () and Dan-Olof Rooth ()

Abstract: This study uses US survey data (NLSY) and Swedish register data to estimate the relationship between returns to schooling and ability for each country separately. A significant and positive relationship is found for Sweden but not for the US. The purpose is to propose an explanation for why such differences might occur. While many studies have focused on whether credit constraints result in inefficiencies in the schooling market, this study answers the opposite question: whether weak credit constraints lead to inefficiencies, in other words in an overuse of the schooling system. It is argued argue that the US schooling system more effectively sorts out education investments with a low rate of return to schooling than the Swedish schooling system. Therefore, an imperfect allocation of individuals going to higher education in Sweden makes a relationship between returns to schooling and ability observable in Sweden but not in the US. Since the relationship between returns to schooling and ability is the same when the schooling systems of the two countries is similar, that is at lower levels of education, it is indicative of the fact that this explanation may be correct. Of course, the empirical findings in this study are not convincing evidence on their own, but the findings suggest and agree with such an explanation.

Keywords: Cognitive ability; return to schooling; credit constraints; (follow links to similar papers)

JEL-Codes: I21; J24; (follow links to similar papers)

26 pages, May 16, 2011

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