Schooling, Wages, and the Role of Unobserved Ability in the Philippines

Yaraslau Zayats, University of North Carolina at Chapel Hill

This paper analyzes the role of schooling and cognitive ability in determining wages for young Filipino adults. It uses a semiparametric model where schooling, achievement test scores and wages are postulated to be driven by a common unobserved ability. Rich data from the Cebu Longitudinal Health and Nutrition Survey allow us to model grade repeats and school reentry after dropping out of school, phenomena common in developing countries. The results reveal that children with lower innate ability are much more likely to drop out of school at all levels of education. While a standard Mincer equation yields a 4.5 percentage point return to an additional year of schooling, my model estimates this return to be only 2.7 percentage points. An omitted ability bias appears substantial. While completing additional years of schooling can compensate for lower innate ability, such substitution would be costly.