Estimating the Effect of Higher Education in Germany on Monetary and Non-monetary Outcomes Using the Marginal Treatment Effect

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We use NEPS (National Educational Panel Study) data to analyze the long-run effects of university education in West Germany between 1958 and 1990 on monetary and non-monetary outcomes in 2010. The outcomes are, on the one hand, income and labor market participation, and, on the other hand, health satisfaction and cognitive abilities (measured as mathematical literacy, reading competence, and reading speed). We contribute to the literature in the following dimensions: to the best of our knowledge, there are no studies on the causal effect of university studies on income and health in Germany. Moreover, there are no studies on the effect of cognitive abilities even in the international literature. In order to derive policy recommendations, we use two methodological building blocks: first, we use exogenous variation in the probability to take up university studies in order to make causal statements instead of mere correlations. Second, we employ a recent innovation in the literature (the marginal treatment effect) that allows to derive statements that can be generalized to a larger extent than those from conventional causal methods (in particular, instrumental variable models). This approach allows to estimate average effects of university education for the entire population as well as estimations of potential policy interventions that have not been implemented before. In an extension, we aim at identifying factors that allow to perform a cost-benefit analysis of university studies. Usually, evaluation studies analyze the gross surplus of interventions - for example the question whether university studies increase income. Using another recent innovation in the literature, we aim at identifying the net surplus which is the gross surplus minus the (usually subjective) individual costs of studying. This is important for policymakers because individuals decide about university studies based on the expected net surplus and not on the gross surplus. Referring to the example above, this means: even if university studies increase income, they do not pay off if the costs are higher than the income increase.