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3. As a natural experiment to determine the effect of education on earnings, a researcher compares the schooling and educational attainment of two groups of people. The first consists of those that lived in a state that devoted a high percentage of its budget to postsecondary education. The second consists of those that lived in a state that devoted little money to education. The first is the treatment group and the second is the control group.

(a) Assuming the researcher has information on the schooling, earnings, and state funding for higher education for a sample of people, how might this natural experiment be conducted?

(b) Evaluate the strengths and weaknesses of this experiment.

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3. As a natural experiment to determine the effect of education on earnings, a researcher compares the schooling and educational attainment of two groups of people. The first consists of those that lived in a state that devoted a high percentage of its budget to postsecondary education. The second consists of those that lived in a state that devoted little money to education. The first is the treatment group and the second is the control group.

(a) Assuming the researcher has information on the schooling, earnings, and state funding for higher education for a sample of people, how might this natural experiment be conducted?

(b) Evaluate the strengths and weaknesses of this experiment.

ANSWER

(a) Economists have tried to use a variety of "natural experiments" to estimate
the causal effect of education on earnings. Under this human capital approach, education is viewed as an investment in human capital that raises the future productivity of individuals in the workplace.

The economic "return to education" is typically estimated using a Mincer-type
regression of the following form:
log(y) = a + b S + other factors + e
where y is earnings ...

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