Learning about the Causes of Monetary Returns to Education across Educational Trajectories

• Applicant: Professor Dr. Matthias Westphal
• Subject Area: Economic Policy, Applied Economics
• Term: since 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 501540940

The question if and how education changes individual productivity in the labor market of individuals remains a key and classic question in economic research. The fundamental economic principles that make individual education choices an essential field of study for economists (foremost trading off current income for a higher expected future income), most likely become even more pronounced in the future due to technological progress and demographic change. Hence, research in education economics helps individuals and society make better choices in an ever more complicated world. This is especially true for research that goes beyond the question of whether education has effects. Knowledge about why education works would directly allow implementing specific policies in many different contexts. Is it elite or comprehensive schools that foster learning, or yet mainly years of schooling per se? To which extent do high school and university education complement each other? Does schooling indeed raise the marginal productivity or is it only the degree, behind which individuals may hide? In this project, I want to shed light on all these questions that relate to monetary returns to education across all educational trajectories. Specifically, these are schooling decisions close to the compulsory education level, choices of different tracks in the German educational system, the role of university education in shaping returns to high school education, and the evolution of monetary returns to education after entering the labor market. Apart from compulsory schooling laws, a purpose-built data set on track-specific school openings in Germany may serve as instruments that allow estimating causal effects at different educational margins. With these instruments, I can answer the questions raised above. What is the heterogeneity in monetary lifetime returns to education across different schooling levels at which compulsory schooling reforms become effective? How large are track-specific returns to education in Germany? I aim at conducting a causal mediation analysis that aims at decomposing the return to academic track education into a specific component caused by university education. Finally, I assess the changes of marginal returns to high school and university education after entering the labor market. If the pure signaling model holds, they must be uncorrelated with other determinants of individual productivity that are unobserved to the employer. This is because individuals can freeride on the productivity of others with the same degree without the employer's notice. If employers learn about productivity differences of their employees, the marginal treatment effects will likely change in lockstep. The speed of this learning will determine the importance of the signaling and the human capital model in shaping monetary returns to education.

• DFG Programme: Research Grants