Private returns to an university education: An instrumental variables approach MANUEL SALAS-VELASCO Teachers College (Columbia University), 525W. 120th Street, Box 181, New York, NY 10027, USA (E-mail: salas-velasco@tc.columbia.edu) Abstract. This article examines the determinants of the salaries that Spanish university graduates earn on the labor market. Different earnings equations are estimated that allow us to measure the economic returns to investment in human capital at the uni- versity level, demonstrating that: on the one hand, considering schooling to be an exogenous variable gives a downward bias to the estimations of the private rates of return to an university education; on the other hand, not taking into account the aspects of the demand-side of the labor market in the traditional Mincerian earnings function, even though schooling is considered as an endogenous variable, the rates of return estimated for an university education would be given an upward bias. The problem concerning the endogeneity of schooling has been corrected in this article by using the instrumental variables technique. Keywords: demand for schooling, earnings differential, human capital, rate of return Introduction 1 Education and earnings are positively linked. ‘‘The universality of this positive association between education and earnings is one of the most striking findings of modern social science.’’ (Blaug 1972, p. 54). Ever since the precursory works of Becker (1964) and Mincer (1974), numerous contributions to the field of Economics of Education have shown, for different countries and time periods, that an individual’s academic qualifications play an important role in establishing the sal- ary he or she receives. In addition, particularly following Card and Krueger’s (1992) influential publication demonstrating that there is a positive significant association between the quality of schools – mea- sured using indices such as the teacher/pupil ratio or teachers’ income – and the incomes students earn on the labor market, a great number of research papers in recent years have concentrated on analyzing the influence the quality of the schooling received has on an individual’s earnings (James et al. 1989; Jones and Jackson 1990; Betts 1995, 1996a, b; Higher Education (2006) 51: 411–438 Ó Springer 2006 DOI 10.1007/s10734-004-6413-6