THE RETURNS TO HIGHER EDUCATION

Dominic RiceKnowledge & Innovation Group, BIS

HEPI seminar, 20.06.12Barclays Corporate HQ, Canary Wharf

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• 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.)

Why do HE returns matter?

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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 £20k- Level 3 and below £16k- Level 4 + £28k (+75%)- First degree £28k (+75%) (+55% cf. L3; +33% cf. Trade

App)- Level 3 £18k- Trade App £21k- Below L3 £16k

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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%

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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)

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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

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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)

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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

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The wage premium

9.4%

16.2%

8.9%

16.2%

10.3%

17.1%

27.4%

13.8%

17.1%

7.1%

23.5%

10.3%

3.6%

1.9%

29.7%

15.3%

26.9%

12.1%

27.4%

27.4%

23.5%

23.5%

29.7%

29.7%Doctorate

Masters

Undergraduate Degree

Foundation Degree

HE Diploma

Other HE

0% 10% 20% 30% 40% 50%All Males Females All Males Females

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Undergraduate degrees – returns by subject

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The net graduate premium£8

2,37

1

£120

,512

£108

,121

£61,

933

£51,

644

£51,

402

£69,

670

£20,

870

£69,

465

£33,

363

£33,

278

£31,

611

£41,

731 £5

8,65

8

£55,

720

£36,

009 £7

6,24

5

£62,

395

£82,

371

£120

,512

£108

,121

£82,

371

£120

,512

£108

,121

15.0%

12.5%

27.6%

17.4%

12.7%12.4%

14.3%14.9%

15.6%14.8%

7.0%

14.9%

8.0%8.7%

11.3%

6.8%

14.9%

12.7%

£0

£50,000

£100,000

£150,000

£200,000

£250,000

£300,000

UndergraduateDegree

FoundationDegree

HE Diploma Other HigherEducation

MastersDegree

DoctoralDegree

0%

5%

10%

15%

20%

25%

30%

Gra

du

ate

pre

miu

mR

ate

of re

turn

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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…

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Pooled estimates of the returns to a first degree compared to A

levels - females

0%

5%

10%

15%

20%

25%

30%

35%

40%Dearden et al (2000)

Walker and Zhu (2001)

Walker and Zhu (2003)

PWC/IOP&RSC (2005)both sexes combined

O'Leary and Sloane(2005a)

Jenkins et al (2007)

London Economics (2011)

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Pooled estimates of the returns to a first degree compared to

A levels - males

0%

5%

10%

15%

20%

25%

30%Dearden et al (2000)

Walker and Zhu (2001)

Walker and Zhu (2003)

PWC/IOP&RSC (2005)both sexes combined

O'Leary and Sloane(2005a)

Jenkins et al (2007)

London Economics(2011)

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Point estimates of the returns to a first degree compared to A levels - females

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Walker and Zhu 2001

Walker and Zhu 2003

McIntosh 2004 (returnholding constant all otherqualifications)

O'Leary and Sloane 2005b

Jenkins et al 2007 (bothsexes combined)

London Economics(forthcoming)

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Point estimates of the returns to a first degree compared to A levels - males

0%

5%

10%

15%

20%

25%

30%

35%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Walker and Zhu 2001

Walker and Zhu 2003

McIntosh 2004 (returnholding constant all otherqualifications)

O'Leary and Sloane 2005b

Jenkins et al 2007 (bothsexes combined)

London Economics(forthcoming)

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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?

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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?)

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• END

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Gross Graduate Premium

After tax earnings associated with 2 or more GCE ‘A’ Levels

Age

Direct Costs (tuition fee minus student support)

Indirect Costs (foregone earnings)

After tax earnings associated with an undergraduate degree

Annual earnings premium

Costs/ Earnings

Representation of costs and benefits associated with qualification attainment

Source: London Economics