Earnings returns to education, experience and health: Evidence from EU-SILC

Using individual-level panel data from European Union Statistics on Income and Living Conditions (2007-2010) we explore to what extend wage differentials across European countries are explained by differences in education, actual experience and health. The human capital literature suggests an important role for these variables in explaining wage patterns. However, while there is a wide support in the empirical literature of the positive impacts of education and experience on wages, the relationship between wages and health is less clear-cut. What makes it most difficult to disentangle these effects is that education, experience, health and wages are interrelated. To deal with these issues, we implement an Efficient Generalized Instrumental Variable estimator. This procedure allows simultaneous control for the correlation between regressors and unobserved individual effects (as fixed effects) and to identify the estimates for the time-invariant covariates, such as education, as a random effects estimator. Furthermore, it eliminates the uncertainty associated with the choice of instruments, since exogenous included variables, and their means over time, are used as efficient instruments. Our preliminary results suggest that taking this possible unobserved heterogeneity in education and experience into account does not significantly affect the estimation results. Instead, correcting for possible unobserved heterogeneity and/or measurement error in SRH status changes the estimation results dramatically. Still, we find that for both men and women in Europe education, actual experience and health have positive impacts on wages.