Estimating the Rate of Return to Education using Microsimulation

Abstract

This paper attempts to use microsimulation methods to compare returns to education in four European countries, Germany, Ireland, Italy and the United Kingdom. This paper broadens the type of measure used to measure the return to education to include interactions with public tax-transfer systems and to consider the effect of differential employment rates on education. Mincer style wage equations are estimated for each country in order to model the return to education of gross earnings. These estimates are then incorporated into a microsimulation model to estimate social, private and fiscal returns to education in the countries. Both point estimates and a distribution of the rates of return are described.