Monotonic Path-Specific Effects: Application to Estimating Educational Returns

TL;DR

This paper introduces a causal mediation framework to decompose educational effects into direct and indirect components, enabling more precise estimation of how different educational transitions impact outcomes like earnings.

Contribution

It proposes a novel additively decomposable causal mediation approach that allows identification of all causal paths with less restrictive assumptions.

Findings

High school completion's returns are mainly direct labor market effects.

Mediation effects through college are minimal due to low progression rates.

Framework facilitates clearer understanding of educational pathways and their impacts.

Abstract

Conventional research on educational effects typically either employs a "years of schooling" measure of education, or dichotomizes attainment as a point-in-time treatment. Yet, such a conceptualization of education is misaligned with the sequential process by which individuals make educational transitions. In this paper, I propose a causal mediation framework for the study of educational effects on outcomes such as earnings. The framework considers the effect of a given educational transition as operating indirectly, via progression through subsequent transitions, as well as directly, net of these transitions. I demonstrate that the average treatment effect (ATE) of education can be additively decomposed into mutually exclusive components that capture these direct and indirect effects. The decomposition has several special properties which distinguish it from conventional mediation decompositions of the ATE, properties which facilitate less restrictive identification assumptions as well as identification of all causal paths in the decomposition. An analysis of the returns to high school completion in the NLSY97 cohort suggests that the payoff to a high school degree stems overwhelmingly from its direct labor market returns. Mediation via college attendance, completion and graduate school attendance is small because of individuals' low counterfactual progression rates through these subsequent transitions.