Bounds on the Return to Education in Australia using Ability Bias

We estimate the average return to education and the ability bias applying a parametric model of intra-household correlation suggested by Card (1999, 2001) to the Household, Income and Labour Dynamics in Australia survey. Using the subsample of dual-earner households, we obtain an average return to education of 5.5% and an ability bias of 19%. Our paper is also the first to provide informative inference results on ability bias. We extrapolate the ability bias estimate from dual-earner households to the whole sample. Using Manski's (1989) nonparametric no assumptions bounds to partially identify the ability bias for the whole sample, we find that ability bias lies between 9% and 63%. This implies an average return to education of between 3.0% and 7.4% for the whole sample. Our estimates are conservative and compare well to other estimates of the average return to education which typically lie to the right of that interval.