March 10th 2010Lancaster1 Higher education returns and effects of ability composition 1.Motivation Increased higher education participation is likely to have various impacts on returns to degrees One channel – through implied changes in composition of different educational groups – has received relatively little attention Compositional changes of interest include by family class background and by ‘ability’ In the current work, we are interested in ability composition

March 10th 2010Lancaster2 2. Aims We will focus on: (i)The college wage premium (ii)Differences in the premium across different groups - gender - ability Why gender? Because graduate expansion has been differential by gender. Why by ability? Because it’s potentially important but often ignored.

March 10th 2010Lancaster3 3.Context HE API in UK shows rapid expansion after mid-1980s, with growth especially dramatic for women. See Figure 1.

March 10th 2010Lancaster4

March 10th 2010Lancaster5

March 10th 2010Lancaster6

March 10th 2010Lancaster7 4.Why did the HE API rise? Demand-side factors: derived demand (SBTC) GCSE pass rates Supply-side factors: Increase in places - finance following student - end of binary divide Loans system W-Z: from mid-80s to mid-90s, SS dominated DD factors => r (specifically, Pg) predicted to fall, cet. par. s r D1 D2 S=MC r s S1 S2 D=MB

March 10th 2010Lancaster8 5.Heterogeneity in ability The simple model of the previous figures assumes workers are homogeneous and hence abstracts from possibility of compositional changes: ssHsH r S 1 =MC 1 sLsL DLDL DHDH

March 10th 2010Lancaster9 A fall in costs can produce a change in the ability composition: (similarly, a change in marginal benefits could produce a change in family background composition) s s L =s H r S 1 =MC 1 DLDL DHDH S 2 =MC 2

March 10th 2010Lancaster10 At the individual level, the issue of the relationship between ability and educational investments when individuals are heterogeneous is well-known and is associated with the problem of ability bias in estimates of returns to education. At the macro (cohort) level, cohort changes (eg in participation) can impact on estimates of returns through changes in the extent of ability bias across cohorts.

March 10th 2010Lancaster11 Assume: Within a cohort: Across cohorts:...

March 10th 2010Lancaster12 Across cohorts:

March 10th 2010Lancaster13 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.

March 10th 2010Lancaster14 The implication is that graduate expansion over cohorts produces a compositional change of a type that leads to a reduction in ability bias (or a lower value to the signal of a degree), ceteris paribus, and hence a lower estimate of the college wage premium. The US literature on this was not developed further as the Blackburn-Neumark analysis was attempting to explain an increase in the college wage premium at a time of higher college participation. Rosenbaum (2003) finds evidence supporting the view that compositional changes can explain longer term patterns in the college wage premium in the US. (See INST: p.11)

March 10th 2010Lancaster15 6. Evidence on the UK college wage premium over time (i)Harkness-Machin (1999) p g was rising in the 80s and constant in the 90s Likely explanation: SBTC in 80s raised r s and r a ; offset in 90s by graduate expansion (ii)Walker-Zhu (2008) (LFS) Focus on birth cohorts of vs (see Figure 1a, p. 5): API more than doubled. Result: p g constant for men (15%) and p g rising for women (40% -> 47%) Conclusion: r a must have been rising to offset what must have been falling r s (and compositional changes)

March 10th 2010Lancaster16 (iii)What can we learn from the birth cohort studies in Britain? HE APIHE APIp g (%) +4 cohorts 1 MenWomen NCDS13% (1977)14% Birth cohort NCS7018% (1989) 2 30% ? ? 1970 Birth cohort 1 Eg, entering HE in 1993, graduating in 1996, 4yrs experience by 2000 when £ observed of 1970 birth cohort. 2 Conceals extent of growth in female participation in HE.

March 10th 2010Lancaster17 Given the much greater expansion in the HE API of women relative to men, we might expect the consequently greater compositional change for women to lead to a relative fall in the college wage premium of women. On (i), if L-mkts are integrated (not segmented by gender), then gender composition changes should not affect r s differentially by gender. There is some evidence that SBTC has favoured women over men. On (ii), again there is evidence of shift in demand to skills associated with female employment. So evidence of relative fall in college premium for women would indicate importance of role for (iii).

March 10th 2010Lancaster18 Data: BCS70. The dependent variable is the natural logarithm of gross hourly wages, age 30. Wage premia are relative to individuals with 2 or more A-levels. The wage equation also includes a wide set of explanatory variables: see paper. λ are the generalized residuals computed from the ordered probit model for the highest educational qualification achieved. The CFA model is identified by parents' education that is included only in the education equation. The F-test refers to the exclusion of parents' education from the controls in the wage equation (2) in the CFA model only identified by functional form.

March 10th 2010Lancaster19

March 10th 2010Lancaster20 HE APIHE APIp g (%) +4 cohorts 1 MenWomen NCDS13% (1977)14% Birth cohort NCS7018% (1989) 2 30% Birth cohort Across the 2 cohorts, p g for men has been remarkably constant while p g for women has fallen dramatically, to be similar to that for men. Supports hypothesis that compositional changes important.

March 10th 2010Lancaster21 7. Degree class signals We now consider the premium associated with the award of a distinction to the most able graduates. Compared to the case concerning the premium for a degree, we expect the premium for a distinction to reflect a relatively strong signalling element. (Note contrast between UK and US: see Arcidiancono et al., 2008.) But HKT interpretation works too. The question we address is: how is da/ds likely to change following an increase in the HE API?

March 10th 2010Lancaster22 Theory As HE API increases, da/ds rises and this causes the estimated premium for a distinction to rise, cet. par.. (nb: impact reduced by d↑) Is this consistent with empirical evidence?

March 10th 2010Lancaster23 USR dataIreland, Naylor, Smith, Telhaj (2009) 1985 – 1993 graduating cohorts (+ HESA data for1998 leavers) (+ GCS data for 1985 and 1990 cohorts) Administrative data on full graduate populations Personal characteristics Academic background Family background University/course information First Destination Survey (EL-SD) Problem with individual earnings (balloon surface) Average occupational earnings (averaged over all years)

March 10th 2010Lancaster24 USR data, summary statistics for those in employment based on the 1993 cohort (continued) VariableMean Mean Degree ClassMalesFemales First (I) Upper Second (II.1) Lower Second (II.2) Third (III) Sample size (n)

March 10th 2010Lancaster25 Average occupational earnings by subject field and degree class for the 1993 cohort MALESFEMALES MeannMeann Degree Class I II II III

March 10th 2010Lancaster26 Selected Results of occupational earnings equation for the 1993 cohort MALES FEMALES VariableCoeff Coeff Degree class I0.038 *** *** II.1 (default) II *** *** III *** *** Other *** *** Note: Premium for a good degree is 6.0%. Similar to estimate of 6.4% for BCS70 students graduating at about same time. From 1990 GCS data, premium for a good degree is 5.0%

March 10th 2010Lancaster27 Degree class coefficient estimates for the and 1998 cohorts Males I II.1 (default) Females I II.1 (default) Why is this an interesting time period? HE API Correlation between API and Premia (1985 – 1993 cohorts): (i)First, Males, = 0.81; (ii) First, Females, = 0.79; (iii) Overall Span (1 st to 3 rd ), Males, = 0.86;(iv) Overall Span, Females, = Over this time period, there is no strong evidence of substantial increases in r s or r a : W-Z show degree returns constant for both men and women at least prior to 1995 graduates.