Using Geographic Variation in College Proximity to Estimate the Return to Schooling

Abstract

Although schooling and earnings are highly correlated, social scientists have argued for decades over the causal effect of education. A convincing analysis of the causal link between education and earnings requires an exogenous source of variation in education outcomes. This paper explores the use of college proximity as an exogenous determinant of schooling. An examination of the NLS Young Men Cohort reveals that men who grew up in local labor markets with a nearby college have significantly higher education and significantly higher earnings than other men. The education and earnings gains are concentrated among men with poorly- educated parents -- men who would otherwise stop schooling at relatively low levels. When college proximity is taken as an exogenous determinant of schooling the implied instrumental variables estimates of the return to schooling are 25-60% higher than conventional ordinary least squares estimates. Since the effect of a nearby college on schooling attainment varies by family background it is possible to test whether college proximity is a legitimately exogenous determinant of schooling. The results affirm that marginal returns to education among children of less-educated parents are as high and perhaps much higher than the rates of return estimated by conventional methods.