THE RETURNS TO HIGHER
EDUCATION
Dominic Rice
Knowledge & Innovation Group, BIS
HEPI seminar, 20.06.12
Barclays Corporate HQ, Canary Wharf
2
Why do HE returns matter?
• Encouraging individuals to go into HE
– economic growth, societal benefits, aspirations, exchequer benefits, global
competition, innovation, life satisfaction, social mobility…
• World of HE fees
– earnings & financial returns have become more important (investment decision)
– focus on returns analysis has become more prominent in last 10-15 years
• Some caveats
–
–
–
–
–
–
curse of the average
data and methodological limitations - and differences
past performance as a guide to the future?
long-term v. short-term impacts
private financial returns – but there are other, wider benefits (can be considerable)
terminology (average/marginal, return, rate of return, graduate premium, etc.)
3
Graduates earn more (1)
• Informative to simply look at average earnings by
qualification (… tells us the key story?)
• On this basis, HE “raw” wage premium of 50-90%
(depending on comparator, amongst other things)
• For example, LFS Q1 2012 [working age, all employees
(inc. part-time), England, median earnings]
-
All
Level 3 and below
Level 4 +
First degree
Level 3
Trade App
Below L3
£20k
£16k
£28k (+75%)
£28k (+75%) (+55% cf. L3; +33% cf. Trade App)
£18k
£21k
£16k
4
Graduates earn more (2)
• ONS April 2011: Graduates (L4+) earned average of
£12,000 more than non-graduates over past decade
(2000 to 2010). [LFS, age 22-64, UK, median]
• ONS August 2011: Employees with a minimum of a 1st
degree earned on average c. 85% more than those with
GCSEs (and equivalent). (1993: was 93%)
[LFS, Q4 2010, age 22-64, UK, median, hourly earnings]
• DLHE, 2009/10 leavers: [1st degree, UK, full-time empl] at 6
months, median earnings £20k, mean £20.5k - cf. mean
for all working age with L3 and below of £22.5k [LFS 2010,
England]
• Long DLHE 2006/07 leavers: [1st degree, UK, full-time empl,
median] increase in earnings from 6 months to 40 months
of around 18% (RPI adjusted), cf. AEI increase of 6.3%
5
Returns: isolating the impact
• But “raw” earnings are not the full story
• Need to control for other things that influence earnings, to get
at the earnings difference due to the HE qual
• Statistical techniques, with large datasets (generally OLS
regression; Mincerian wage equation)
• Can’t control for everything – but do our best!
• “Wage premium”: average percentage increase in earnings due
to having a degree (or other qual)
• Related to this:
– the “Graduate Premium”: lifetime earnings benefit [discounted; NPV; can include
(some) costs - “net GP”]
– rate of return (benefits v. costs)
• Can use similar approach to assess employment effects
(average ppt increase in the probability of being employed from having a degree; estimated using a
probit/logit model)
6
Analysis of HE returns/wage premium
• Several papers/reports (some funded by BIS and
predecessor departments, some not)
• Most use pooled LFS data
• Most look at 1st degrees v. A-levels… and often
2+ A-levels
• Separately for males and females
• Vary in terms of other ‘issues’ covered
– subject, HEI, other HE quals (lower and higher), Exchequer
benefits, costs (eg. foregone earnings, tax, fees), age,
degree class, employment effects, cohorts…
• Differences in methodology and time periods
7
General findings
• Returns to degree of order of 20-30% (higher
than for other quals)
• Higher for women than for men
• Overall, have held up well over past 15-20 years
• Graduate premium of over £100k
• Have returns fallen in recent years, with big
increase in number of grads? Largely, jury still
out - some indications they may have done for
some groups (but still substantial)
8
The Returns to HE Qualifications
(BIS report, June 2011, London Economics)
• Most recent comprehensive study into the returns to HE qualifications
– Full report available at www.bis.gov.uk/research
• Analysis of pooled LFS data between 1996 and 2009
• Types of returns considered:
–
–
–
–
The percentage wage premium
Employment effects
The lifetime net graduate premium and internal rate of return
The lifetime exchequer benefit and rate of return
• Returns to 1st degree and sub-degree level qualifications measured
relative to those with 2+ A levels only
• Returns to postgraduate qualifications measured relative to those with
undergraduate degrees only
• Further disaggregation by subject studied and class of degree for
undergraduate degrees
9
The wage premium
All
0%
Other HE
HE Diploma
Foundation Degree
Males
20%
10%
1.9%
Doctorate
All
30%
Males
Females
40%
50%
12.1%
7.1%
26.9%
3.6%
17.1%
10.3%
15.3%
13.8%
Undergraduate Degree
Masters
Females
23.5%
29.7%
23.5% 27.4%
29.7%
23.5%
27.4%
29.7%
27.4%
8.9%
10.3%
9.4%
16.2%
17.1%
16.2%
Average
Education
29.7%
23.5%
27.4%
44.5%
19.7%
37.0%
6.3%
11.7%
19.2%
2.3%
10.4%
Historical and Philosophical Studies
Creative Arts and Design
16.5%
19.7%
15.5%
Non-European languages and literature
26.7%
11.5%
20.8%
24.5%
6.3%
17.6%
Linguistics, Classics and related subjects
European Language and Literature
11.3%
4.5%
8.4%
35.1%
28.8%
32.6%
42.6%
38.8%
41.2%
25.2%
25.4%
26.0%
32.0%
27.8%
31.3%
27.0%
15.3%
20.7%
40.2%
32.0%
38.1%
48.3%
36.9%
41.1%
30.1%
22.1%
27.0%
16.5%
11.2%
15.1%
45.1%
32.3%
39.7%
Mass Communication and Documentation
Business and Administrative Studies
Law
Social Studies
Architecture, Building and Planning
Technologies
Engineering
Mathematics and Statistics
Physical/Environmental Sciences
Agriculture
-1.0%
-10%
20.3%
12.4%
17.4%
0%
Veterinary Sciences
10%
Biological Sciences
20%
41.2%
26.1%
38.0%
30%
Subject Allied to Medicine
40%
91.7%
70.1%
82.8%
50%
Medicine and Dentistry
% wage premium
10
Undergraduate degrees – returns by subject
100%
90%
80%
70%
60%
11
The net graduate premium
14.9%
£300,000
27.6%
30%
12.7%
11.3%
8.7%
£250,000
8.0%
25%
£200,000
15.0%
HE Diploma
Other Higher
Education
£62,395
£76,245
15%
£108,121
10%
£120,512
£36,009
£82,371
£31,611
£33,278
£33,363
£69,465
£69,670
£51,402
£51,644
£61,933
Foundation
Degree
£20,870
£0
Undergraduate
Degree
7.0%
£108,121
£120,512
£50,000
£82,371
£100,000
£55,720
12.5%
£108,121
12.7%
£58,658
12.4%
14.9%
£120,512
14.3%
£41,731
15.6%
14.9%
14.8%
£82,371
£150,000
20%
17.4%
5%
0%
Masters
Degree
Doctoral
Degree
Rate of return
Graduate premium
6.8%
12
The returns to HE over time
• Expansion in HE places since early 1990s has
led to a rapid expansion in the supply of
graduates
• However, no obvious fall in average returns over
time (→ the demand for graduates has kept up
with supply?)
• Comparability issues between studies
• But, as a broad indication, look across a few
studies…
13
Pooled estimates of the returns to a first degree compared to A
levels - females
40%
Dearden et al (2000)
35%
30%
Walker and Zhu (2001)
25%
Walker and Zhu (2003)
20%
10%
O'Leary and Sloane
(2005a)
5%
Jenkins et al (2007)
0%
London Economics (2011)
19
19 92
9
19 3
9
19 4
19 95
9
19 6
19 97
9
19 8
20 99
0
20 0
0
20 1
20 02
0
20 3
20 04
0
20 5
20 06
0
20 7
0
20 8
20 09
10
15%
PWC/IOP&RSC (2005)
both sexes combined
14
Pooled estimates of the returns to a first degree compared to
A levels - males
30%
Dearden et al (2000)
25%
Walker and Zhu (2001)
20%
15%
10%
Walker and Zhu (2003)
PWC/IOP&RSC (2005)
both sexes combined
O'Leary and Sloane
(2005a)
Jenkins et al (2007)
0%
London Economics
(2011)
19
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
0
20 9
10
5%
15
Point estimates of the returns to a first degree compared to A levels females
50%
Walker and Zhu 2001
45%
40%
Walker and Zhu 2003
35%
25%
McIntosh 2004 (return
holding constant all other
qualifications)
20%
O'Leary and Sloane 2005b
30%
15%
10%
5%
19
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
09
0%
Jenkins et al 2007 (both
sexes combined)
London Economics
(forthcoming)
16
Point estimates of the returns to a first degree compared to A levels males
Walker and Zhu 2001
35%
30%
Walker and Zhu 2003
25%
20%
15%
McIntosh 2004 (return
holding constant all other
qualifications)
O'Leary and Sloane 2005b
10%
5%
Jenkins et al 2007 (both
sexes combined)
19
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
0
20 3
0
20 4
0
20 5
0
20 6
0
20 7
0
20 8
09
0%
London Economics
(forthcoming)
17
The returns to HE by cohort
• But graduates are not all the same…
– Older graduates who have had more labour market experience may not be
affected by the expansion in HE
– Their presence in the data would mask the effect of expansion on younger
graduates
• A few studies have looked directly at returns for different
graduate cohorts
– Although still substantial, younger cohorts do appear to have experienced some
fall in their returns
– This seems to be worse for female graduates (who also experienced the largest
expansion in graduate numbers) and those at the lower end of the earnings
distribution
– There is also evidence that the variability in the returns to HE is rising
– Reasons for all this?
18
Some issues…
• Communicating this evidence to wider audience? - future students
(at school), parents, teachers, careers advisors, tax-payers…
• Data limitations: going beyond averages, sub-groups, changes over
time, individual courses by individual HEI, the marginal student,
part-time students, mature students…
• HEI on LFS as from 2012 (potentially…)
• Estimating impact of student fees and support package – building
these into estimates (no estimations have been made under the
new student support system)
• Current study being done for us by Walker & Zhu: further analysis
of HE returns…
• Analysing wider (often non-monetary) benefits
• Just because some of these things may be falling, still worthwhile
• Can we try and be too sophisticated in our analysis? (is it worth it?)
19
• END
20
Representation of costs and benefits associated with qualification attainment
Costs/ Earnings
After tax earnings associated with an undergraduate degree
Annual earnings premium
Gross Graduate Premium
After tax earnings associated with 2 or more GCE ‘A’ Levels
Indirect Costs (foregone earnings)
Age
Direct Costs (tuition fee minus student support)
Source: London Economics