graduate returns, he expansion and ability composition

21 June 2014 ESPE 2014 Braga 1

Graduate returns, HE expansion and ability composition

Based on joint work with Jeremy Smith and Shqiponja Telhaj

Motivation

• Policy (HE Fees regimes: Dearing, Browne)

Variation by gender, subject, university, background, cohort, cohort characteristics (age-participation index, API)

• Educational Returns: Returns to What?

Years? Qualifications? Performance?


Educational Returns: Returns to What?


Variation by performance measure:

If HKT: econometrician suffers info’ asymmetry

estimates of performance premium suffer ability bias

extent of bias likely to vary with API

If Signalling: employer suffers info’ asymmetry

return to education is a return to signalled ability (short-lived under EL-SD)

return is likely to vary with API


Educational Returns: Returns to What?


Prospective students are interested in variation by performance measure:

•Bigger Variation => greater risk

•If HKT: individuals uncertain of their capacity to acquire HK

•If Signalling: individuals uncertain about ability & signals might have long-term effects (contrary to EL-SD)


Figure 1 Long-Term Trends in Participation in Higher Education (Age Participation Index (API))

API (%) Source: DfES. NCDS – BCS70 cohorts Note: (i) 1977-1989 conceals gender difference W-Z (LFS) 1977 1989 Λ

HE API males 22% 24% 2%pts HE API females 17% 23% 6%pts (ii) Wage observations capture cohort neighbour effects

1960 1965 1970 1975 1980 1985 1990 1995 2000

10

20

30

40

50

Entry interval Wage obs interval


Ability compositionand returns to ability

Assume: ,w w s a s

+ x (ability diff)

+ ability bias (if econometrician suffers

asymmetric information)

or

HK

s a

g

dw w w da

ds s a dsr r

p

R + value of signal (if employer suffers

asymmetric information)


Ability Composition

The US college wage premium: theory and evidence

can change because of changes in:

(i)

(ii)

(iii)

The literature has focused on (i) and (ii) (see Cawley et al., 2000) .

But see Blackburn and Neumark (1991, 1993, 1995) and R

s

a

dw

dsr

r

da

ds

osenbaum (2003).

And also Hendricks and Schoellman (2013).


The college wage premium (under pure signalling): uniform ability distribution.

*a a a a

ga na

*F a 1 *F a

f a

What happens if HE API grows? There is no change in . But this is a special result under the uniform distribution .

Blackburn and Neumark show that under a triangular distribution, falls .

da

ds

da

ds

Ability Composition: Graduate returns in the UK


What happens to and hence the ‘performance

premium’ with an increase in the API?

Even under the uniform distribution, the performance premium will increase as the ability gap is stretched…da

ds

da

ds


0

1

a

f(a)

O

50

A

36

L

8

H

6

0.07

1

0.25

0.68

0.90

0.97

Ability distribution across broad educational groups; 1985 characterisation.


Let’s now turn to the evidence.

1.What is the evidence on returns to degrees in the UK? (BCS70 relative to NCDS 1958)

2.Is there a substantial ‘performance premium’ among graduates? (High vs Low degree class)

3.Has any such premium changed over time in the way consistent with ‘composition-induced changes in ability bias’?


Results 1: UK evidence on returns to a degree (1970 birth cohort)

HE API HE API

(%)+4 cohorts1 Men

Women

NCDS 14% 14% 12-18 34-381958 (1977)Birth cohort (17%,11%)

(men, women)BCS70 1970 (1989)Birth cohort (19%,17%)

(men, women)

1Eg, entering HE in 1993, graduating in 1996, 4yrs experience by 2000 when £ observed of 1970 birth cohort.

/dw ds

18% 30% 15 18


Results 2: UK evidence on returns by degree class

Note RDD approach of Feng and Gaetz, LSE 2013:

Implied estimate of ca. 8% for ‘good’ over ‘lower’ degree

(Is that high or low…?)

Consider relative to College Wage Premium: BCS70 and LFS…

Mean (2-digit) SIC earnings, DLHE (6 months), 4 cohorts, ca500 students per cohort, 2005-10, matriculating 2002-07 (API stable at ca3 5% - similar to API for our 1998 HESA cohort).


Results 2: UK evidence on returns by degree class (‘1970’ birth cohort) - Estimated log wage premia (BCS70)

(1) (2) (3) (4)

Wages observed in year: 2000 2000 2008 2008

Wages observed at age: 30 30 38 38

Good degree class premiumrelative to lower degree class

0.078(0.007)

0.073(0.012)

0.080(0.040)

0.069(0.074)

Lower degree class premiumrelative to 2+ A-levels

0.119(0.000)

0.106(0.000)

0.262(0.000)

0.223(0.000)

Ability and background controls No Yes No Yes

Other controls Yes Yes Yes Yes

No. of Obs 3046 3046 1856 1856

R2 0.081 0.103 0.141 0.170

Notes: p-values in parentheses. Ability controls include: BAS (verbal), BAS (numerical). Background controls include: parental income, parental social class, mother’s interest in education, father’s interest in education, mother’s education, father’s education. Other controls include: region (aged 10), gender, marital status and number of children, ethnicity.


Results 2: UK evidence on returns by degree class (‘1970’ birth cohort) - Estimated log wage premia (LFS: 1969-71 births)

Notes: p-values in parentheses. Wages observed between 2005Q1 and 2012Q4 and have been deflated by the average earnings index. Other controls include: gender, marital status and number of children, ethnicity and tenure with current employer.

Wages observed at: 2005-2012

Wages observed at age: 36-41

Good degree class premium(relative to lower degree class)

0.087(0.001)

Lower degree class 0.188

(relative to 2+ A-levels) (0.000)

Other controls Yes

No. of Obs 2930

R2 0.152



BCS70 and LFS have cell size limitations…

…so consider full student populations and administrative data…


Results 2: UK evidence on returns by degree class (‘1970’ birth cohort) - Estimated log earnings premia (USR91: 1969-71 births)

Note: p-values in parentheses. Ability controls include: pre-University qualifications. Background controls include: social class of parents, school-type. Other controls include: gender, marital status, University attended and type of degree course.

Earnings observed at: 1992 1992

Earnings observed at age: 21-23 21-23


0.046(0.000)

0.043(0.000)

Ability and background controls No Yes

Other controls Yes Yes

No. of Obs. 22,459 22,459

R2 0.334 0.336



The USR administrative data has two limitations:

• Graduate 4-digit occupations, rather than personal wages

• Graduate destinations after only 1 year.

So consider Graduate Cohort Surveys…


Results 2: UK evidence on returns by degree class (‘1970’ birth cohort) - Estimated log wage premia (GCS1990: 1968-70 births)

Note: p-values in parentheses. Ability controls include pre-university qualifications, background controls include parental education, and other controls include age, gender, ethnicity, and marital status.

(1) (2) (3) (4)

Wages observed at: 1991 1991 1996 1996

Wages observed at age 21-23 21-23 26-28 26-28


0.051(0.014)

0.049(0.014)

0.084(0.014)

0.079(0.014)

Ability and background controls No Yes No Yes

Other controls Yes Yes Yes Yes

No. of Obs 2839 2839 3652 3652

R2 0.127 0.131 0.115 0.119


Results 3: Evidence on Performance Premium across cohorts


Results 3: UK evidence on returns by degree class (across cohorts)

Estimated log-wage good degree class premia (LFS) – selected birth and age cohorts. See notes to Table 2 for controls included in these models.

Birth Cohort 1973/74 1975/76 1977/78 1979/80Wages observed at: - - 2005-09 2007-11Wages observed at age: - - 28-31 28-31Good degree class premiumrelative to lower degree class

- - 0.062(0.070)

0.033(0.246)

No. of obs - - 1297 1587R2 - - 0.119 0.138 Wages observed at: - 2005-09 2007-11 -Wages observed at age: - 30-33 30-33 -Good degree class premiumrelative to lower degree class

- 0.114(0.001)

0.107(0.001)

-

No. of obs - 1313 1474 -R2 - 0.135 0.131 - Wages observed at: 2005-09 2007-11 - -Wages observed at age: 32-35 32-35 - -Good degree class premiumrelative to lower degree class

0.090(0.012)

0.090(0.005)

- -

No. of obs 1394 1496 - -R2 0.162 0.180 - -


Results 3: UK evidence on returns by degree class (across cohorts)

Estimated log-earnings premia (USR; HESA: selected cohorts) and by university type, graduates aged 21-23

Cohort 1985 1986 1987 1988 1989 1990 1991 1992 1993 1998 All 0.025

(0.00)0.026(0.00)

0.023(0.00)

0.030(0.00)

0.021(0.00)

0.034(0.00)

0.043(0.00)

0.061(0.00)

0.064(0.00)

0.064(0.00)

HE popn 14% 14% 15% 15% 15% 16% 16% 18% 20% 22% (30%)

R2 0.499 0.468 0.427 0.421 0.399 0.373 0.336 0.275 0.273 0.214

Old Civic Universities 0.028 0.025 0.027 0.033 0.023 0.035 0.051 0.066 0.080 0.067 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) [36.1] [36.5] [36.7] [36.3] [35.9] [36.5] [35.5] [36.7] [36.6] [33.3] New Civic Universities 0.028 0.025 0.029 0.036 0.031 0.042 0.051 0.059 0.048 0.048 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) [15.7] [15.3] [15.6] [15.4] [15.4] [15.7] [16.2] [16.1] [16.7] [15.1] E-CAT Universities 0.013 0.025 0.027 0.021 0.012 0.026 0.039 0.045 0.063 0.058 (0.03) (0.00) (0.00) (0.00) (0.07) (0.00) (0.00) (0.00) (0.00) (0.00) [14.1] [13.9] [13.6] [13.7] [14.3] [14.0] [13.8] [14.3] [14.2] [15.6] 1960s founded Universities 0.038 0.040 0.035 0.036 0.024 0.032 0.051 0.065 0.060 0.060 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) [15.8] [15.7] [15.4] [15.4] [15.9] [15.7] [16.3] [15.9] [15.7] [16.8] Other Scottish Universities 0.016 0.012 0.024 0.020 0.017 0.049 0.034 0.051 0.059 0.060 (0.09) (0.23) (0.02) (0.05) (0.13) (0.00) (0.01) (0.00) (0.00) (0.00) [8.5] [9.0] [8.9] [8.9] [8.7] [8.5] [8.1] [7.5] [7.7] [8.0] Other Welsh Universities 0.017 0.053 0.028 0.024 0.016 0.045 0.001 0.091 0.067 0.086 (0.28) (0.01) (0.11) (0.16) (0.36) (0.03) (0.97) (0.00) (0.01) (0.00) [2.5] [2.4] [2.6] [2.9] [2.7] [2.7] [2.8] [2.8] [2.9] [5.0]


Results 3: UK evidence on returns by degree class (across cohorts) - Estimated

log-wage good degree class premia (GCS: 1985 and 1990) Notes: See notes to Table 4.

Graduate cohort 1985 1985 1990 1990

Wages observed at 1986 1991 1991 1996

Wages observed at age 21-23 26-28 21-23 26-28


0.064(0.023)

0.079(0.020)

0.049(0.014)

0.079(0.014)

No. of Obs 1330 1738 2839 3652

R2 0.139 0.150 0.131 0.119


5. Conclusions/limitations/further work

(i) Some evidence that substantial increase in API of women has been associated with a fall in the college wage premium- but not correcting for selection into

employment. (ii) Some evidence that degree class premium

has increased over time with increase in API(iii) Need to analyse more recent

HESA/DLHE/follow-up data.(iv) Need to complement large data results with

‘fine data’ analysis – eg RDD.

graduate returns, he expansion and ability composition

Documents

ability distribution

graduate returns

apieducational returns

ability signals

ability compositionbased

ability compositionand

ability gap

performance measure