Thursday , October 17 2019
Home / Worthwhile Canadian Initiative / Are the returns to university education falling?

Are the returns to university education falling?

Summary:
[Updated to fix coding errors in some of my graphs.] Prices are determined by supply and demand. The supply of university-educated Canadians, relative to the supply of college or high school graduates, is increasing. University participation rates have been climbing for decades (Source: CAUT): Canada's points based immigration system, which prioritizes those with valuable skills, further increases the supply of highly educated Canadians. Unless the demand for university graduates rises along with the supply, ECON 1000 reasoning suggests that rising education levels will, eventually, erode educated workers' earnings advantage. There are a number of excellent papers on the returns to education in Canada, and how these have evolved over time over time, such as Burbidge, Magee

Topics:
Frances Woolley considers the following as important: ,

This could be interesting, too:

Tyler Cowen writes Facebook and privacy

Alex Tabarrok writes The O-Ring Model of Development

Tyler Cowen writes Michael Kremer, Nobel laureate

Tyler Cowen writes Abhijit Banerjee reminiscenses

[Updated to fix coding errors in some of my graphs

Prices are determined by supply and demand. The supply of university-educated Canadians, relative to the supply of college or high school graduates, is increasing. University participation rates have been climbing for decades (Source: CAUT):

University participation rates

Canada's points based immigration system, which prioritizes those with valuable skills, further increases the supply of highly educated Canadians. Unless the demand for university graduates rises along with the supply, ECON 1000 reasoning suggests that rising education levels will, eventually, erode educated workers' earnings advantage.

There are a number of excellent papers on the returns to education in Canada, and how these have evolved over time over time, such as Burbidge, Magee and RobbBoudarbat, Lemieux and Riddell, 2010,  Ren and Shannon (2017, gated), and Bourbeau, Lefebvre and Merrigan.

The most up-to-date analysis I could find was Foley and Green, 2015, which uses Labour Force Survey data to calculate the earnings gap between more educated Canadians and high school graduates up to 2013. They found that, particularly for younger men, the wage gap between more educated workers and high school graduates has gradually narrowed since the year 2000. The figure below is taken from their paper, and summarizes some of their findings. The thick solid lines, say, show the difference between the average log wages of a bachelor's degree holder and the average log wages of a high school graduate. That difference is rising, for men, until 2000, and then it starts to fall. For women the difference in log wages between bachelor's degree holders and high school graduates is larger, and more stable.

Foley green education wage premium

The downward trend in male university graduates' wage advantage from the late 1990s to 2013 is clear, but it is not large - and it only takes the wage premium for bachelor's degree holders back to where it was in the 1980s. This trend does not, for me, provide a satisfactory explanation why pundits are alleging that campus life isn't what it used to be, and that the jobs available to university graduates are not exactly what they had in mind. While the trends documented by Foley and Green are consistent with the concerns expressed by university-skeptics, they just aren't that large or dramatic. [Update] Moreover, when I take 2018 Labour Force Survey data, and attempt to replicate and extend Foley and Green's findings, I no longer find that clear downwards trend. The average gap in log wages between 25-34 year old bachelor's degree holders and high school graduates was 0.24 in January, 1998 - and almost exactly the same in January, 2018. 

Yet even if education remains a good investment, it is also a very risky one. The figure below shows kernel density distributions of hourly wages for male high school graduates and bachelor's degree holders in 1998 and 2018. These are simply descriptions of raw, underlying, hourly wage data, comparable to the data Foley and Green used, weighted to take account of the Labour Force Survey's sampling design and, for the 1998 data, adjusted for inflation using the Consumer Price Index. (Note that self-employed individuals are excluded from the distribution.) 

Male earnings 1998 and 2018 25 to 34

[Updated: the above image is correct. The small image below is the original one I posted, which actually compares people with some post-secondary education to graduate degree holders]

  Male earnings 1998 and 2018 25 to 34

The kernel density distributions make it immediately apparent that wage premia, which focus on differences in average wages, miss much of the story. There is much greater wage inequality among bachelor's degree holders now than there was in 1998, and also among high school graduates. While the top-earning bachelor's degree holders are doing just fine, the lowest-earning degree holders are seeing their wage advantage over high school graduates shrink. [Updated] The key questions for anyone thinking about pursuing post-secondary education are "where would I be on that high school wage distribution?" and "where would I be on the bachelor's degree wage distribution?" This determines, at an individual level, the returns to education - and it's something economists don't know a great deal about.

The picture for women is slightly different. Women with high school degrees now seem to be somewhat more concentrated in low wage jobs than they were in 1998, while the wage distribution for women with bachelor's degrees appears to have shifted to the right, as well as becoming more spread out. The declining wage premium for bachelor's degree holders seems, to some extent, to be a guy thing. [Updated] The female wage distribution, especially for high school graduates, is bounded at the bottom by the minimum wage. Increases in the minimum wage, as happened in Ontario in January, 2018, would be expected to shift the wage distribution upwards.  This could explain why the estimated average gap in log wages between high school graduates and bachelor's degree holders actually falls between 1998 and 2018.

Female earnings 1998 and 2018 25 to 34

[Updated, the above picture is correct; the small picture below is the one originally posted, which actually shows people with some post secondary v. people with a post-graduate degree]

Female earnings 1998 and 2018 25 to 34

It has always been the case that some university degree holders don't do any better than high school graduates. But two things have changed. First, there are more bachelor's degree holders now than in, say, 1998, so that bottom chunk of the bachelor's degree wage distribution represents more people. Second, university tuition has increased, so a given wage now represents a lower return on investment. Bachelor's degree holders in the bottom of the wage distribution are completely justified in asking, "what went wrong?"

 Here economists can only give partial answers. There is very good work by Finnie and Frenette (2003), Ostrovsky and Frenette (2014), and Frenette and Frank (2016) on returns to field of study. This literature, however, tells a story about how not why. That computer science or commerce graduates earn more than psychology or fine arts graduates explains how variation in the earnings distribution is generated. But it does not explain why people choose low-paying majors over high-paying ones. Is it because they are unable to gain admission into a program of study with better job prospects? Are they ill informed? Or do they enjoy the non-pecuniary benefits of studying psychology or fine arts? The field of study literature also does not explain why employers choose to hire who they do. For example, why might an employer prefer a commerce major when marketing is, to a large extent, just applied social psychology? How much of employers' willingness to pay more for, say, engineering graduates reflects those graduates' gender, rather than (or as well as) their specific knowledge? 

The literature is also largely silent on what aspects of university education create value. Here it is interesting to look at a couple more diagrams, which add the wage distributions for college graduates onto those of high school and university graduates, for men:

Kernel density earnings education men january 2018

Kernel density earnings education men january 2018 no students[Updated: original diagram is small picture

And for women:

Kernel density earnings education women january 2018

Kernel density earnings education women january 2018 no students

 Universities typically have stricter entrance requirements than colleges, and the courses take much longer to complete.  Yet many men graduating from university earn less than the typical college graduate. 

What is it that universities do that generates earnings premiums? Yes, I know, some mix of signalling ability and building human capital. But what mix? And what is it that universities do that generates that human capital? Does listening to me lecture magically confer upon my students some earnings advantage? Or do students learn more from their peers than their profs? Or perhaps much of the value of university comes from building social capital, as argued by Mara, Davis and Schmidt?

Please share your thoughts in the comments.

Frances Woolley
I am a Professor of Economics at Carleton University, where I have taught since 1990. My research centres on families and public policy. My most-cited work is on modelling family-decision making, measuring inequality within the household, feminist economics, and tax-benefit policy towards families. I hold a BA from Simon Fraser University, an MA from Queen’s, and completed my doctorate at the London School of Economics, under the supervision of Tony Atkinson.

Leave a Reply

Your email address will not be published. Required fields are marked *