Higher Education, Mental Ability, and Screening

Using regression analysis we find that mental ability, education, and background factors are important determinants of earnings at several points in the individual's life cycle. Real social rates of return to education based on this analysis range from 11 percent for those with some college to about 2 percent for those with a Ph.D., while private rates are slightly higher. Rates of return to an undergraduate degree are about 8 percent. We conclude that these returns reflect, in part, the use of education as a relatively inexpensive screening device by employers, and without screening the private returns might be up to 50 percent below those mentioned above.