Empirical specification: OLS One equation log(earnings of person i y=Xa+B,; +ZB2+u+8 (1) y: log of monthly earnings Edu: years of schooling X: observable family variables Z: observable individual variables(age, gender job tenure) unobservable determinants of earnings lybbthesis: Edu has a positive effect on earnings Difficult to identify this effect because of endogeneity8 Empirical specification: OLS ◼ One equation: log(earnings) of person i ◼ y: log of monthly earnings ◼ Edu: years of schooling ◼ X: observable family variables ◼ Z: observable individual variables (age, gender, job tenure) ◼ : unobservable determinants of earnings ◼ Hypothesis: Edu has a positive effect on earnings ◼ Difficult to identify this effect because of endogeneity (1) i Xi 1 Edui Zi 2 i i y =  +  +  +  + 