Fifty Years of Mincer Earnings Regressions

By James J. Heckman, Lance Lochner, Petra E. Todd. 2003

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The Mincer earnings function is the cornerstone of a large literature in empirical economics. This paper discusses the theoretical foundations of the Mincer model and examines the empirical support for it using data from Decennial Censuses and Current Population Surveys. While data from 1940 and 1950 Censuses provide some support for Mincer's model, data from later decades are inconsistent with it. We examine the importance of relaxing functional form assumptions in estimating internal rates of return to schooling and of accounting for taxes, tuition, nonlinearity in schooling, and nonseparability between schooling and work experience. Inferences about trends in rates of return to high school and college obtained from our more general model differ substantially from inferences drawn from estimates based on a Mincer earnings regression. Important differences also arise between cohort-based and cross-sectional estimates of the rate of return to schooling. In the recent period of rapid technological progress, widely used cross-sectional applications of the Mincer model produce dramatically biased estimates of cohort returns to schooling. We also examine the implications of accounting for uncertainty and agent expectation formation. Even when the static framework of Mincer is maintained, accounting for uncertainty substantially affects the return estimates. Considering the sequential resolution of uncertainty over time in a dynamic setting gives rise to option values, which fundamentally changes the analysis of schooling decisions. In the presence of sequential resolution of uncertainty and option values, the internal rate of return - a cornerstone of classical human capital theory - is not a useful guide to policy analysis.

Subfields: Accounting, Economics and Econometrics

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Citations in the corpus

Local Linear Forests (2018, neutral): “To illustrate the promise of local linear forests, we consider the problem of predicting the logarithm of wages as a function of covariates including years of education, age, race, and gender; this function plays an important role in the study of labor markets (Heckman, Lochner, and Todd 2003).”
Are Emily and Greg More Employable than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination (2003, background): “Federal contractors, who are thought to be more severely constrained by affirmative action laws, do not treat the African-American re-sumes more preferentially; neither do larger employers or employers who explicitly state that they are "Equal Opportunity Employers."”
The Speed of Employer Learning (2007, background): “An estimate of is obtained from observed life-cycle earnings profiles f(s; i) and the 1980 tuition costs of $2,500 reported by Heckman et al. (2003).(14) The notation emphasizes that this estimate is conditional on the rate i used to discount labor earnings.”
Human Capital Measurement: A Survey (2010, background): “The Mincerian regression coefficient loses its information content and may have no meaning (Heckman et al., 2003).”
2008-2 Earnings Functions and Rates of Return (2008, methodology): “Formal non-parametric statistical tests, reported in Table 1 of Heckman, Lochner, and Todd (2003), reject the hypothesis of parallel experience - log earnings profiles (i.e., separability of log w(s, x) in terms of x and s) for whites for all Census years except 1940 and 1950.14 For black males,…”
Cumulative Advantage as a Mechanism for Inequality: A Review of Theoretical and Empirical Developments (2006, methodology): “Both Merton’s path-dependent CA model and Rosen’s non-CA model should be distinguished from the simple form of CA (equation (6)), which was most clearly expressed in Mincer’s (now standard) human capital earnings function (Mincer 1974), and which is still considered seminal within labor economics ( ”
Interpreting the Evidence on Life Cycle Skill Formation (2005, background): “…rate of return to schooling, and the internal rate of return is not well-deÞned in sequential dynamic programming models.40 Willis (1986) and Heckman, Lochner, and Todd (2003) state the conditions under which the Mincer rate of return will equal the marginal internal rate of return to…”
Immigrant over-education: evidence from Denmark (2007, positive): “The Mincer equation is based on a formal model of investment in human capital (see e.g. Heckman et al. 2003 and Willis 1986), leading to the following equation, which regresses log earnings (wit) on a constant term, a linear term in years of schooling (sit), and linear and quadratic terms in years…”