Using Unemployment Rates as Instruments to Estimate Returns to Schooling

I use state unemployment rates during a person's teenage years to estimate the returns to schooling. A higher unemployment rate reduces the opportunity costs of attending school. Using the same 1980 Census data set that Angrist and Krueger (1991) use, I also estimate returns to schooling with a modified version of their quarter‐of‐birth instrument. The estimates from the two‐stage least squares (2SLS) model using the unemployment rate and the model using the quarter‐of‐birth instruments are almost identical. In addition, these 2SLS estimates are larger than the ordinary least squares (OLS) estimates, supporting this counterintuitive, yet prevalent, result in the literature.