Human Capital and Economic Opportunity: A Global Working Group Working Paper Series Working Paper No. 2011-002

The Effects of Educational Choices on Labor Market, Health, and Social Outcomes James J. Heckman John Eric Humphries Sergio Urzua Gregory Veramendi

October, 2011

Human Capital and Economic Opportunity Working Group Economic Research Center University of Chicago 1126 E. 59th Street Chicago IL 60637 [email protected]

THE EFFECTS OF EDUCATIONAL CHOICES ON LABOR MARKET, HEALTH, AND SOCIAL OUTCOMES ∗ James J. Heckman University of Chicago, University College Dublin and the American Bar Foundation

Sergio Urz´ ua Northwestern University, NBER and IZA

John Eric Humphries University of Chicago

Gregory Veramendi Aarhus University

First version: October 10, 2009 This version: July 26, 2011

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James Heckman: Department of Economics, University of Chicago, 1126 East 59th Street, Chicago, IL 60637; phone, 773-702-0634; fax, 773-702-8490; email, [email protected] John Eric Humphries: Department of Economics, University of Chicago, 1126 East 59th Street, Chicago, IL 60637; phone, 773-980-6575; email, [email protected] Sergio Urz´ ua, Department of Economics and Institute for Policy Research, Northwestern University, Handerson Hall, 2001 Sheridan Road, Evanston, IL 60208; phone, 847-491-8213; email, [email protected] Gregory Veramendi, Aarhus University, School of Economics and Management, Bartholins Alle 10, Building 1322, DK-8000 Aarhus C, Denmark; phone, 45-8942-1546; email, [email protected] We thank Chris Taber for comments on this draft. This research was supported by NIH R01-HD32058-3, NSF SES-024158, and NSF SES-05-51089, the J.B. and M.K. Pritzker Foundation, NIH R01 HD054702, NIH R01-HD065072-01, an INET grant to the Milton Friedman Institute, an ERC grant to the University College Dublin, and the American Bar Foundation. The Web Appendix for this paper is http://jenni.uchicago.edu/effects-school-labor.

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Abstract Using a sequential model of educational choices, we investigate the effect of educational choices on labor market, health, and social outcomes. Unobserved endowments drive the correlations in unobservables across choice and outcome equations. We proxy these endowments with numerous measurements and account for measurement error in the proxies. For each schooling level, we estimate outcomes for labor market, health, and social outcome. This allows us to generate counter-factual outcomes for dynamic choices and a variety of policy and treatment effects. In our framework, responses to treatment vary among observationally identical persons and agents may select into the treatment on the basis of their responses. We find important effects of early cognitive and socio-emotional abilities on schooling choices, labor market outcomes, adult health, and social outcomes. Education at most levels causally produces gains on labor market, health, and social outcomes. We estimate the distribution of responses to education and find substantial heterogeneity on which agents act. Keywords: education, early endowments, factor models, health, treatment effects. JEL codes: C32, C38, I12, I14, I21 James Heckman Department of Economics University of Chicago 1126 East 59th Street, Chicago, IL 60637 Phone: 773-702-0634 Email: [email protected]

John Eric Humphries Department of Economics University of Chicago 1126 East 59th Street, Chicago, IL 60637 Phone: 773-980-6575 Email: [email protected]

Sergio Urz´ ua Department of Economics and Institute for Policy Research Northwestern University Handerson Hall, 2001 Sheridan Road, Evanston, IL 60208 Phone: 847-491-8213 Email: [email protected]

Gregory Veramendi School of Economics and Management Aarhus University Bartholins Alle 10, Building 1322, DK-8000 Aarhus C, Denmark Phone: 45-8942-1546 Email: [email protected]

Contents 1 Introduction

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