Structural estimates of the intergenerational education correlation

Abstract

Abstract Using a structural dynamic programming model, we investigate the relative importance of family background variables and individual specific abilities in explaining cross‐sectional differences in schooling attainments and wages. Each type of ability is the sum of one component correlated with family background variables and a residual (orthogonal) component which is purely individual specific. Household background variables (especially parents' education) account for 68% of the explained cross‐sectional variations in schooling attainments, while ability correlated with background variables accounts for 17% and pure individual specific ability accounts for 15%. Interestingly, individual differences in wages are mostly explained by pure individual specific abilities as they account for as much as 73% of the explained variations in wages. Family background variables account for only 19%, while ability endowments correlated with family background account for 8%. Copyright © 2003 John Wiley & Sons, Ltd.