Estimating the effects of family background on the return to schooling

This article examines the causal link between family background characteristics-parental education and family size-and returns to schooling. I implement a model of schooling and earnings with heterogeneous returns to education using data from the Occupational Change in a Generation Survey. I find that men raised in larger families have substantially lower returns to education, whereas the combined effects of parental education are more modest. In addition, like other "supply-side" instrumental variables studies of the causal effect of education, I find two-stage least squares estimates that are larger than the corresponding ordinary least squares estimates. The results suggest an alternative explanation for this phenomenon: constant marginal return to schooling, combined with a negative absolute ability bias and a positive comparative advantage bias.