5.1 An Example

The causal effect of schooling on wages is the increment to wages an individual would receive if he or she got more schooling. A range of studies suggest the causal effect of a college degree is about 40 percent higher wages on average, quite a payoff. The causal effect of schooling on wages is useful for predicting the earnings consequences of, say, changing the costs of attending college, or strengthening compulsory attendance laws. This relation is also of theoretical interest since it can be derived from an economic model.