Dynamic Rates of Return to Education in the U.S

This paper uses U.S. Current Population Survey data to develop new "dynamic" and "expected dynamic" rates of return to education for synthetic cohorts of males and females for 1967-95 that take trends in earnings at older ages and annual changes in education institutional costs into account. These rates are more comparable to standard computations of total returns on financial assets and are more relevant to nationwide or statewide decisions to invest in education. We find that the standard cross-section (static) rates of return are misleading (unless adjusted) since they tend to overstate the actual returns for graduates when the net earnings trend is downward, and to understate it when the trend is upward. The latter is very important for college graduates since about 1980, and especially for women. In particular, based on adjustments for net "ability" bias from recent studies of identical twins, we find that the standard cross-section rates of return underestimate the returns to college in 1995 by 3 percentage points for male college graduates and 5 percentage points for females. Assuming that recent trends are based on underlying technical change, globalization, and other factors that are likely to persist, these expected dynamic rates averaged 13.3% in real terms or 11.7% if corrected for ability, family factors, and for measurement error in schooling