The effect of household characteristics on economic returns to schooling: evidence from the Palestinian territories

This paper estimates the economic returns to schooling in the Palestinian territories, and examines the relationship between household characteristics and the returns received by male household members in the labour market. The basic findings are that the economic returns to schooling are very low, and the inclusion of household characteristics in the wage equation does not significantly lower the estimated returns to schooling. Yet, the least-square estimate of the economic returns to schooling in Palestine is overestimated because of omitted unobservable household characteristics from the wage-schooling relationship. This is true even after correcting for measurement error in the schooling variable. The measurement error-corrected least square estimator of the returns to schooling is overestimated by 32%. Nevertheless, the omitted variable bias is of different magnitude in the West Bank and the Gaza Strip. In fact, the results indicate that such a bias exists in the West Bank whereas the results for the Gaza Strip indicate no such bias. Thus, household background is likely to be a less important determinant of both education and earnings in the Gaza Strip.