October, 2000, Vol. 123, No. 10
the tide rises
In the Internet boat
Ability and returns to schooling
Précis from past issues
For whom the tide rises
Katharine L. Bradbury, in her article "Rising Tide in the Labor Market: To What Degree Do Expansions Benefit the Disadvantaged?" (New England Economic Review, May/June 2000) examines whether the decade of the 1990s has proven to be a true labor boon, for whom, and to what extent. She writes that some groups may experience disadvantages in the labor market, which "may be attributable to barriers in the labor market as well as to differences in group characteristics such as educational attainment. Different reasons for disadvantage suggest different likely responses to the business cycle." Has the "rising tide," in fact, lifted all boats?
In general, Bradbury notes that blacks and whites, teenagers and adults all have felt positive effects from the economic expansion. The downside, though, has been "when one asks whether a strong economy raises all boats to the same level, [it appears that] disadvantaged groups still have above-average unemployment." The author has found that educational attainment remains the key element as to whether a person will be able to ride the high points of the crest or be contented to coast along at the lowest points of the trough.
In the Internet boat
The Industry Standard, a newsweekly covering the Internet Economy, wanted to find out how ’Net workers were doing in terms of job satisfaction. Their study gathered data about each respondent and their compensation package, job satisfaction, and benefits of Internet Economy employees in online and offline firms.
What floated the Internet workers’ boats? "Challenging work" had the biggest impact on job satisfaction. Salary was a close second. "Not options—cash money," reported the Standard’s Maryann Jones Thompson in the September 11 issue (www.thestandard.com/article/display/0,1151,18386,00.html), "[a]nd this workforce demonstrated a true work-hard-play-hard ethic: Paradoxically, working weekends and receiving lots of vacation time were equally strong predictors of happiness at work."
This research, which was conducted after the dot.com stock market tide went out, found that workers are pretty realistic about the Internet Economy: "Most know their chance to retire at 30 may not materialize but still feel fortunate to be working for a company that values its employees." But this does not seem to have discouraged the ’Net set—more survey respondents reported being very satisfied at work this year than last year.
Ability and returns to schooling
To what extent does ability explain the rise in the return to education observed in the past couple of decades? Measurement problems related to this question are addressed in a recent paper by James Heckman of The University of Chicago (who is one of this year’s Nobel Prize winners in Economics) and Edward Vytlacil of Stanford University.
In "Identifying the Role of Cognitive Ability in Explaining the Level of and Change in the Return to Schooling," (NBER Working Paper No. 7820), Heckman and Vytlacil describe possible explanations for why the ability bias may have increased over time, therefore increasing the measured return to education. It may be that the modern economy provides a greater return to ability than the economy of decades ago; also, the amount of schooling that individuals receive may be more correlated now with their ability than in the past, if enrollment is now more merit-based than in the past.
Heckman and Vytlacil note that the ability bias is usually considered to be a problem of omitted variables. The data sets that have been used to measure the economic return to education tend to lack a measure of individual ability. However, in this paper, Heckman and Vytlacil analyze a data set that does contain measures of ability—the National Longitudinal Survey of Youth (NLSY). Data from this survey, whose participants were between the ages of 14 and 22 in 1979, include scores from a battery of 10 intelligence tests. Heckman and Vytlacil use the first principal component of the test scores as a measure of general intelligence. To perform their analysis, they classified individuals by ability and education, into what are called "cells." Their analysis is confined to data for white males, as the data are too sparse within cells for other groups to permit analysis.
Heckman and Vytlacil show that education and ability have such a strong association that the effects of the two on wages cannot be separated for all groups. For example, they find that (within age groups) the wage differential between college graduates and high school graduates rose in the mid 1980s for young workers in the highest quartile of ability but not for those in the next highest quartile. Furthermore, there are so few college graduates in the lowest two quartiles of ability that the college-high school differential cannot even be identified in those quartiles.
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