Causal Returns to Education and Compulsory Schooling in the United States: The Importance of Opportunity Costs

Abstract: Although early instrumental variable studies documented a significantly positive monetary return to education, more recent studies have found less evidence to support this conclusion. The authors provide a new perspective on these recent studies by demonstrating that additional compulsory schooling increases both education and subsequent earnings, but only in states where there exist relatively strong effects of these laws on schooling choices. Pooling all states in the analysis masks the robust effects of education in states with greater effects of compulsory schooling laws on educational attainment. Consistent with other studies, findings suggest that state-level effects of compulsory schooling may be a function of outside labor market opportunities.