The Causal Effect of Parents’ Education on Children’s Earnings

Abstract

"We present a model of endogenous schooling and earnings to isolate the causal effect of parents’ education on children’s education and earnings outcomes. The model delivers a positive relationship between parents’ education and children’s earnings and an ambiguous relationship with children’s schooling. Identification is achieved by comparing the earnings levels of children with the same schooling level but of parents with different schooling levels. A generalized version of the model with heterogeneous tastes for schooling is estimated using the HRS data with parents’ schooling. The empirically observed, positive OLS coefficient from regressing children’s schooling on parents’ schooling is mainly accounted for by the correlation between parents’ schooling and children’s unobserved tastes for schooling. But this is countered by the negative structural relationship between parents’ and children’s schoolingchoices, resulting in a negative or close to zero IV coefficient when exogenously increasing parents’ schooling. Nonetheless, an exogenous one-year increase in parents’ schooling increases a child’s lifetime earnings by 1.2 percent on average."