The aim of this paper is to estimate the effect of innate ability on the returns to education and wages. Our purpose is to obtain a proxy for individual ability using available data. We develop a theoretical microeconomic model of schooling demand in which the individual’s years of education depend on innate ability, family conditions and the provincial cost of education. This model enables us to obtain a variable for ability by using the differences between the individual’s years of education and the aggregate years of education in the province, taking into account that costs may differ across provinces. This allows us to solve the lack of information of the Spanish data. In the empirical analysis ECBC-91 data are used and the sample are separated by gender and into age groups. The results show that there is no ability effect on wages and that the returns to education are not up-biased.

Key words: human capital, ability, returns to education.
JEL classification: J24, J31, I2.