Electronic Thesis and Dissertation Repository

Thesis Format

Integrated Article

Degree

Doctor of Philosophy

Program

Economics

Supervisor

Lochner, Lance

Abstract

This thesis consists of three studies, which explore topics related to labor economics. Chapters 2 and 3 examine the returns on student loans and student loan repayment policy, respectively. Chapter 4 examines the returns to skill and the evolution of skills at older ages.

In Chapter 2 (co-authored with Lance Lochner), we study rates of return on government student loans in Canada using novel administrative data from the Canada Student Loans Program. We exploit rich information on personal characteristics, loan amounts, field of study, and institution of attendance to explain differences in rates of return across different types of borrowers. We find that field of study is a particularly important determinant of rates of return, explaining 60-70% of the variation in predicted returns across borrowers, while institution differences explain only about 10% of the variation. We also show that if private lenders were to cream-skim borrowers with predicted returns above 10% (5%), the average return would fall from the current -5% to -6.4% (-9.4%), raising the cost of the government student loan program and adverse selection concerns.

In Chapter 3, I study the effects of introducing an income-based student loan repayment (IBR) plan when considering labor market risks and the insurance provided by parents. I develop a dynamic life-cycle model with endogenous parents-to-children transfers, together with children’s education, borrowing, repayment, and labor supply decisions. After estimating the model using the National Longitudinal Survey of Youth 1997, I quantify the impacts of introducing an IBR while keeping the government budget constant. IBR crowds out savings and parental transfers as it provides more insurance to borrowers. Interestingly, a weak labor supply response to IBR suggests that moral hazard is not a concern. Further, the college enrollment rate increases, and the largest gains are for low-income and low-ability families. Finally, aggregate welfare increases with relatively low-income families benefiting the most.

In Chapter 4 (co-authored with Lance Lochner, Youngmin Park, and Youngki Shin), we show that repeated cross-section data with multiple skill measures (one continuous and repeated) available each period are sufficient to nonparametrically identify the evolution of skill returns and cross-sectional skill distributions. With panel data and the same available measurements, the dynamics of skills can also be identified. Our identification strategy motivates a multi-step nonparametric estimation strategy. We further show that if any continuous repeated measurement is shown to be linear in skills, a much simpler GMM estimator can be used. Using Health and Retirement Survey data on men ages 52+ from 1996-2016, we show that one of the available (continuous and repeated) skill measures (word recall) is linear in skills and implement our GMM estimation approach. Our estimates suggest that the returns to skill were fairly stable from the mid-1990s to the Great Recession and rising thereafter. We document considerable differences in skills and lifecycle skill profiles over ages 52-70 across cohorts, with more recent cohorts possessing lower skills in their mid-50s but experiencing much weaker skill declines with age. We also document skill differences by education and race, which are stable across ages and explain roughly one-third and one-half, respectively, of the corresponding differences in wages.

Summary for Lay Audience

This thesis consists of three studies, which explore topics related to labor economics. Chapters 2 and 3 examine the returns on student loans and student loan repayment policy, respectively. Chapter 4 examines the returns to skill and the evolution of skills at older ages.

In Chapter 2 (co-authored with Lance Lochner), we calculate the net revenue the government receives by lending to undergraduate students in Canada. We also look at what types of borrowers are the most “profitable” to the government. We find that, on average, the government has lost 5 cents for every dollar it lent out. We also find that field of study is the most important predictor for repayment. The government gets more revenue by lending to students studying in law, education, health-related, and engineering-related majors compared to other majors. We also quantify the government revenue losses if private lenders were to siphon away the more profitable borrowers.

In Chapter 3, I study the impacts of introducing an income-based student loan repayment (IBR) plan for university graduates. There have been concerns among policy makers that increasing debt levels and uncertainty around finding a well paying job has made it increasingly difficult for current graduates to repay their student loans. This has led to policy proposals that the student loan repayment program should be income-based, i.e., repayment should be based on borrowers’ income instead of their debt. However, IBR may reduce the revenue that the government can collect, and even encourage some people to work less. In this chapter, I study the effects of introducing an IBR while keeping the government budget fixed. My analysis considers one of the most important aspects of college financing --- parental transfers, and examines how parental transfers and students with different levels of parental transfers respond to the new policy. I find that IBR leads to less savings and fewer parental transfers. Two important behavioural responses to IBR are that (i) very few borrowers work less because of IBR and (ii) IBR encourages more youth from low-income families to go to college. Social welfare increases because of the introduction of IBR.

In Chapter 4 (co-authored with Lance Lochner, Youngmin Park, and Youngki Shin), we study the returns to skill and the evolution of skills for older men in the U.S. The literature is not yet settled on whether the rising wage inequality in the U.S. is due to higher returns to skill or greater dispersion of skills across workers. Because skill is not directly observed, previous literature has had to make strong assumptions to differentiate between these two channels. In this paper, we develop a novel strategy to separate the returns to skill from the evolution of skills, without making any strong assumptions. Using data that repeatedly measures the cognitive abilities of men ages 52+, we show that one of the measures (word recall) is linear in skills. This finding is critical for us to separate the returns to skill from the evolution of skills. Our estimates suggest that the returns to skill were fairly stable from the mid-1990s to the Great Recession and rising thereafter. We also find that more recent cohorts possess lower skills in their mid-50s, but they experience much weaker skill declines with age. We observe substantial skill differences by education and race. These differences are stable across ages and explain roughly one-third and one-half, respectively, of the corresponding differences in wages.

Creative Commons License

Creative Commons Attribution 4.0 License
This work is licensed under a Creative Commons Attribution 4.0 License.

Available for download on Friday, December 31, 2021

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