IZA DP No. 230: Should I Stay or Should I Go? Educational Choices and Earnings: An Empirical Study for Portugal
published in: Journal of Population Economics, 2003, 16 (2), 307-322
In this paper we analyse educational choices and earnings of individuals at two different levels in the Portuguese educational system. At each potential exit level we consider two decisions: the decision to continue studying and the employment decision, whereas normally only the first decision is modelled. Correlation between the error terms of the earnings functions and the decision functions, for each level of education, is allowed and we correct for the potential selectivity bias. We find empirical support for the existence of selectivity bias as the errors of the earnings functions are correlated with the disturbances of both decision functions for both educational levels considered. Moreover it is precisely the existence of selectivity mechanisms that renders the decisions actually taken by individuals optimal in terms of comparative earnings advantage. The obtained marginal rates of return to additional education vary between 2.3 and 9.6 percent per additional year of schooling, depending on whether or not selectivity effects are excluded from the computations. This finding reinforces again the importance of selectivity mechanisms in explaining educational choices.