Concluding remarks

Due to heterogeneity in human capital, the individual will self select his or her educational attainment. In this situation, sorting and selection on unobserved heterogeneity results in a bias estimator for rate of return to education using the conventional OLS and IV methods. The OLS tends to underestimate, while the IV method tends to overestimate. By considering heterogeneity in an individual’s abilities and self selection in education, this paper estimates the rate of return to university education in Taiwan using Manpower Utilization survey data for 1990 and 2000.

Estimation results show that without considering an individual’s heterogeneity in abilities and selection in educational choice, the OLS and IV methods will generate bias and inconsistent estimators for the effect of treatment on the treated. The estimated marginal treatment effect confirms the heterogeneous human capital hypothesis, that there is a heterogeneous rate of return to education among individuals.

The declining trend of the MTE curve further justifies the self selection on unobserved heterogeneity according to the principle of comparative advantage, that those who attain university are more willing to pay a higher price for schooling and hence tend to obtain a higher return on education.

The estimated average annual rates of return to university education are 11.5%

and 6.64% in 1990 and 2000, respectively, higher than the coefficients estimated by OLS. However, for those who receive university education, their marginal rates of return to education are 19% and 15% for 1990 and 2000, respectively, higher than the average rate of return. Moreover, the expected rates of return to education in 1990 and 2000 are a random variable that follows certain distribution. These results are all consistent with the theory of self selection on unobserved heterogeneous abilities. As for the declining trend of rate of return to university education, it may be caused by the rapid expansion of colleges and universities and the increasing supply of college graduates in the 1990s.

Thus, major implications of our findings are that as heterogeneity creates sorting gain among individuals, the finding of very significant and persistent sorting gains for those who choose to have university supports the heterogeneous human capital hypothesis. Moreover, the estimated average treatment effect will significantly different from the effect of treatment on the treated, i.e., the average rate of return to education will be significantly less than the rate of return to those choose to have university. However, the implementation of college expansion policy in the 1990s tends to reduce the average rate of return to education over time, and at the mean time the magnitude of selection bias will also decline too as more and more high school graduates start to enter the university under college expansion policy. As a result, the the bias between the estimated effect by OLS and the effect of treatment on treated will shrink.

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