You are on page 1of 1

Econ 665 Assignment 3

Damla Hacibrahimolu 1572791

Mobility and the Return to Education: Testing a Roy Model with Multiple Markets Dahl, G.B. (2002) Dahl (2002) is motivated by the puzzling observation that returns to college education vary significantly among the states of US however given the high rate of internal mobility one would expect the wage differentials to narrow and the returns to education to homogenize over time. Replacing the occupation choice in the original Roy model with the choice of location, a selfselection model based upon comparative advantage is developed. The paper implements semiparametric estimation in a multiple-index framework to correct for the specification bias and states that even when the estimates are corrected for this bias, the wage differentials among states prevail, signifying the presence of strong differences in the return to education and amenities among the US states. The underlying theoretical framework and how this framework improves the Roy model for a number of estimation problems should be well-understood since it constitutes the main essence of the paper. The deviation of an individuals earnings in a particular state from the entire populations mean wage (which is independent of his state of birth) and the deviation of his mobility preferences (which depends both on the state of birth and residence) sum up and yield the sub-utility function. Since an individual can only be observed in one of the fifty-one destinations in terms of his state of residence and there is no observation of the counterfactuals, the utility maximization choice takes the observed choice as the selection rule. In contrast to the original two-sector Roy model and the extensions that make use of distributional assumptions that simplify the estimation procedure, the author is faced with a multi-market framework which brings out the problem of dimensionality (regarding the correlation of error terms in the N earnings equation). Making use of Lees maximum order statistics the dimensionality of error terms is reduced to a bivariate distribution. Then the probability of internal migration is narrowed down to two for the movers and one for the stayers, making it possible to formulate the earnings equation in a multiple index framework. The index sufficiency criterion is tested thorough Monte Carlo simulations. Using the subset of full time white male workers aged between 25 and 34 from the 1990 US Census Data the model estimates the migration probabilities of the individuals (gathering those with the same observed characteristics into same cell groups and identifying movers/stayers) and then corrects the specification bias inherent in the returns to college education estimates (by accounting for SMSA, marital status, education). Results reveal that the OLS estimates of the wage equation are biased up to 20 percent in some instances (the corrected estimates are significantly lower than the uncorrected estimates), revealing the presence of self-selection regarding the choice of where to live and work. Comparing Dahl (2002) with Kennan and Walker (2011), two points should be emphasized. Dahl (2002) observes that the wage differential among states does not narrow down signifying the presence of state specific features but the state specific returns to college education accounts only for the 9.6% of college graduate migration. Hence, as in most of the internal migration literature (also in Kennan and Walker (2011)), much of the causal relationship is not accounted for especially due to unobserved features and factors that simultaneously derive the migration decision and the earning equation. Second, while Dahl (2002) models migration as a response to state specific frictions (premium differentials) in a single life time utility maximization framework, Kennan and Walker (2011) builds up a search model where migration is modeled as a response to expected lifetime gains.