Can education compensate for low ability? Evidence from British data

Abstract

This article investigates whether the returns to education vary with the level of cognitive ability. Unlike much of the literature, this article finds that the return to schooling is lower for those with higher cognitive ability indicating that education can act as a substitute for observed ability. Using quantile regressions we also find that, again unlike most of the literature, returns are higher at lower quintiles of the conditional earnings distribution. This suggests that education is also a substitute for unobserved ability. The policy implications are that increasing education in general and particularly for those with lower ability should reduce income inequality.

Acknowledgements

The first author is also affiliated to the Institute for Fiscal Studies, London. Permission to use the NCDS given by the ESRC Data Archive at the University of Essex is gratefully acknowledged.

Notes

¹ Some recent work argues that there has been an over-emphasis on cognitive ability relative to more behavioural characteristics of individuals (e.g. Bowles et al ., 2001; Carneiro and Heckman, 2003). Cascio and Lewis (2005) show that the National Longitudinal Survey of Youth (NLSY) reflects school achievement and not just innate ability.

² Full results and descriptive statistics available on request. There are eight regional dummies and five firm size dummies.

³ Ability is the first principal component over four measures of ability: mathematics at age seven, verbal, nonverbal abilities and comprehension at age 11. It is normalized to have a mean and SD of 0 and 1, respectively.

⁴ For the quantile regressions these are based on bootstrapping with 1000 replications.