On Omitted Variables Bias and Measurement Error in Returns to Schooling Estimates

Lam and Schoeni (1993) consider an equation where earnings are explained by schooling and ability. They assume that ability data are lacking and that schooling is measured with error. The estimate obtained by regressing earnings on schooling thus contains omitted variable bias (OVB), which is positive, and measurement error bias (MEB), which is negative. A simulation procedure is suggested that will yield consistent estimates of the true return and the measurement error variance.