Endogenous Mincerian Returns: Explaining Cross-Country Variation in the Returns to Schooling

This paper calibrates a model in which both schooling levels and returns to schooling are endogenous and examines the extent to which cross-country variation in Mincerian returns can be explained by technology and supply factors (i.e., variation in life expectancy, retirement ages, fertility, implied discount rates, and government funding of education in a cross-section of fifty-nine countries) alone. The returns from the calibrated model is highly correlated with the data and the model is able to explain twenty-five percent of the variation in the data. Variation in the direct costs of schooling caused by variation in government funding levels and fertility contribute the most to the explanatory power of the model. Nevertheless, high effective discount rates are needed to reconcile the high level of Mincerian returns in the data. ∗I am grateful to Virgiliu Midrigan for his exceptional work as a research assistant. I hav benefitted from comments from Paul Evans and Tom Mroz, as well as those received in presentations at Ohio State and the SED 2003 meeting. I thank the the Ohio State University for financial support. All mistakes are, of course, my own.