# What do the findings suggest about the relation between years of schooling and wages?

Imagine a population where there is only one level of ability. The Department of Economics of
University A is asked to estimate the returns to schooling for this specific population. The research team
gathers data from all levels of educational qualifications and estimates the following specification:
log(π€π€) = ππππ + ππππβππππ π£π£π£π£π£π£π£π£π£π£π£π£π£π£π£π£π£π£
Where w is the workerβs wage rate, s is the number of years of schooling and b captures the returns to
schooling. The researchers find that the returns to schooling are equal to ππ = 0.07 .
a. What do the findings suggest about the relation between years of schooling and wages?
Interpret the result. Do the findings agree with economic theory? [30%]
b. University B criticizes the methodology used by University A, claiming that important
determinants are omitted from the main specification. They suggest that the βMincer equationβ
is used instead. Explain what the βMincer equationβ is and why it might be a more appropriate
approach in this framework. [25%]
c. Imagine that the initial population has two levels of ability instead of one; High and Low.
Ability is unobservable. University A uses the Mincer equation to estimate the returns to
schooling. University B claims that the estimate is biased. What kind of biases does estimating
this equation in a population with two different ability levels cause? Is the final estimate likely
to be overestimated or underestimated due to those biases, and why? [25%]
d. University A hires you to find a way to properly estimate the returns to schooling. Suggest a
method you would use to correct the biases, and describe it. [20%]