Optimal Schooling Investments and Earnings: An Analysis Using Australian Twins Data

The potential impact that unobserved ability can have on both schooling and earnings outcomes has been modelled by Ashenfelter and Rouse (1998). This paper applies their model to the Australian Twins Sample. The best estimate of the return to schooling for genetically identical (or MZ) twins is 8.9 per cent. Measurement errors in the schooling data are shown to constitute a more serious problem than the omission of the family effects that impact on ability. Individuals from higher ability families receive a lower marginal benefit from their investment in human capital.