Abstract
This paper examines the causal effect of education on earnings in Israel. The Ordinary Least Squares coefficient of schooling on earnings (the Mincer coefficient) is likely to be biased upwards because it ignores the unobserved 'ability' which is correlated with schooling and has a positive effect on earnings. We use two methods to estimate the causal effect of education on earnings: The first is to use proxy variables-variables that are correlated with the unobserved ability of the individual, such as mother's education and siblings' wage. The second method is to use the amendment to the Compulsory Education Law, which extended free education to all high-school grades, and also raised the minimal age limit for compulsory education by one year, as an instrumental variable. We found that this amendment increased the years of schooling of students whose fathers were born in Asia or Africa. We conclude that the causal effect estimated by the instrumental variable was not different from that obtained using Ordinary Least Squares regressions.