The other day, Justin Wolfers posted an interesting figure on the returns to education:
Employment and earnings by education level
What would happen if we put this poster in every classroom?
education pays
February 25, 2012 by swissecon
Swiss Economist
Thoughts and Pictures from Sankt Gallen
Swiss Economist 
You’re not assuming that correlation implies causation, are you?
Not in general of course 🙂
In the present case you’d need a good measure of education. For obvious reasons “years of education” or educational degrees are just very rough indicators.
But nevertheless, better qualified individuals do earn higher wages and are less likely to suffer from unemployment. I don’t think there is much debate about this causal link. There is, however, the question of general equilibrium effects: that is, if all individuals were to have a PhD, the overall unemployment rate would not simply be 1.9 percent as indicated in the figure. Unfortunately, this is a common misunderstanding.
“But nevertheless, better qualified individuals do earn higher wages and are less likely to suffer from unemployment. I don’t think there is much debate about this causal link.”
I agree that better-qualified individuals earn higher wages. If you mean that there is not much debate about whether individuals who are objectively better qualified for a job (in skills and abilities, not paper credentials) earn more, and that that link is causal, I think I agree. If, however, you mean that individuals who have more education earn more, and that that link is undisputedly predominantly causal, I disagree.
Another logical possibility is that people who have (A) more ability going in (let’s call it intelligence) will tend to (B) do better in academic programs, and also (C) do better at their jobs—and that both B and C are caused by A, instead of (or in addition to) C being caused by B. If so, employers value an applicant’s academic degree not only because it implies certain learned skills, but also (conceivably even primarily) because it implies that the applicant was smart enough to do well in that academic program.
My understanding is that this is not only a logical possibility, but that there is also some evidence that it may in fact be the case, to some degree.
Have you read Herrnstein and Murray’s The Bell Curve?
Regarding your first point, of course, it is qualification for a job that matters. Not some educational degree. But this gives rise to the problem of measuring qualification. As I pointed out, using years of schooling is only a very rough approximation.
Totally agree with your second point. There is a whole literature on finding instruments (distance to university, month of birth, etc.) in order to control for ability. If you like, I can post the major papers on that topic.
I will have a look at “The Bell Curve” 🙂
[…] have long seen the unemployment statistics which show that those with more years of schooling are doing much better in the labor market. The straightforward (and naïve) conclusion has been that more young people must stay in school […]