The Returns to Formal Schooling in Turkey using Pseudo-Panel Data

Year 2018, Volume: 4 Issue: 2, 13 - 33, 27.12.2018

Hacı Mevlüt Karataş

Abstract

The returns to education
is of great interest in public policies and labor economics. It has been widely
studied by many experts for decades. It has been acknowledged that in a
Mincerian wage equation, ordinary least squares estimates are biased due to the
endogeneity of education. One way to deal with this endogeneity could be
removing individual fixed effects using panel data. However, education of an
individual is fixed once their wage is observed. Thus, panel data would wipe
out the information on education. On the other hand, using pseudo-panel
approach the returns to education can be estimated making use of repeated cross
section data. There are limited studies on returns to education on Turkey
despite the fact that its crucial importance in the public policy. In this
paper we estimate returns to education for Turkey using a pseudo-panel data
approach. We make use of Turkish Household Labor Force data for the years 2009-2014
in order to construct pseudo-panel data. We find that one additional year of education
increases individual wages by around 8.5 percent using ordinary least squares.
However, using pseudo-panel fixed effect estimation leads a 9.3-percent rate of
returns to education. Thus, we show that there is a downward bias in ordinary
least squares estimates of returns to education in Turkey.

Keywords

Returns to Education, Pseudo Panel, Fixed Effects, Turkey

The Returns to Formal Schooling in Turkey using Pseudo-Panel Data

Abstract

The returns to education
is of great interest in public policies and labor economics. It has been widely
studied by many experts for decades. It has been acknowledged that in a
Mincerian wage equation, ordinary least squares estimates are biased due to the
endogeneity of education. One way to deal with this endogeneity could be
removing individual fixed effects using panel data. However, education of an
individual is fixed once their wage is observed. Thus, panel data would wipe
out the information on education. On the other hand, using pseudo-panel
approach the returns to education can be estimated making use of repeated cross
section data. There are limited studies on returns to education on Turkey
despite the fact that its crucial importance in the public policy. In this
paper we estimate returns to education for Turkey using a pseudo-panel data
approach. We make use of Turkish Household Labor Force data for the years 2009-2014
in order to construct pseudo-panel data. We find that one additional year of education
increases individual wages by around 8.5 percent using ordinary least squares.
However, using pseudo-panel fixed effect estimation leads a 9.3-percent rate of
returns to education. Thus, we show that there is a downward bias in ordinary
least squares estimates of returns to education in Turkey.

Keywords

Returns to Education, Pseudo Panel, Fixed Effects, Turkey

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