Estimating the Returns to Schooling: A Comparison of Fixed Effects and Selection Effects Models for Twins

Abstract

Strong empirical links exist between the number of years spent schooling and earnings. How­ever, the relationship may be masked due to the effect of unobserved factors that influence both wages and schooling. Two of the main econometric models, namely fixed-effects and se­lection-effects, used to analyse returns to schooling were compared using monozygotic and di­zygotic twins’ datasets in Ghana. The efficiency of the models was assessed based on the stan­dard errors associated with the return to schooling estimates. Goodness of fit measures was used as a basis for comparison of the performance of the two models. The results revealed that based on their standard errors, the regression estimates from the selection effects model (MZ = 0.1014±0.0197; DZ = 0.0947±0.0095) were more efficient than the regression estimates from the fixed-effects model (MZ = 0.1115±0.0353; DZ = 0.082±0.0127). However, the AICc values of the fixed effects model (MZ_AICc = 57.8 and DZ_AICc = 105.4) were smaller than the AICc values of the selection effects model (MZ_AICc = 151.6 and DZ_AICc = 221.6). Findings from the study indicate that, although both models produced consistent estimates of the economic returns to schooling, the fixed effects model provided a better fit to the twins’ data set.