March 17th 2010Nottingham1 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 17th 2010Nottingham2 2. Aims We will focus on: (i)The college wage premium (ii)Differences in the premium across different groups - gender - ability/performance Claim: Graduate Expansion -> changes in ability composition -> impact on college wage premium (etc) in ways consistent with evidence

March 17th 2010Nottingham3 3.Context HE API in UK shows rapid expansion after mid-1980s, with growth especially dramatic for women. See Figure 1.

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March 17th 2010Nottingham8 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 17th 2010Nottingham9 5.Heterogeneity in ability The simple model of the previous figures assumes workers are homogeneous and hence abstracts from possibility of compositional changes: note ability bias issue (schooling correlated with ability) ssHsH r S 1 =MC 1 sLsL DLDL DHDH

March 17th 2010Nottingham10 A fall in costs can produce a change in the ability composition (and hence in extent of ability bias): (and also a change in the marginal return: see W-Z QR results) s s L =s H r S 1 =MC 1 DLDL DHDH S 2 =MC 2

March 17th 2010Nottingham11 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 17th 2010Nottingham12 Assume: Within a cohort: Across cohorts:...

March 17th 2010Nottingham13 Across cohorts:

March 17th 2010Nottingham14 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 17th 2010Nottingham15 Implication: Graduate expansion over cohorts -> compositional change -> 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 pdf...)

March 17th 2010Nottingham16 6. Evidence on the UK college wage premium over time (i)Harkness-Machin (1999) 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: constant for men (15%) and 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 17th 2010Nottingham17 (iii)What can we learn from the birth cohort studies in Britain? HE APIHE API (%) +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 17th 2010Nottingham18 Predictions: (a) Reduction in ability bias => fall in estimate of college wage premium, but offset by increases in r s and r a brought about by SBTC etc (b) 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.

March 17th 2010Nottingham19 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.

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March 17th 2010Nottingham21 HE APIHE API(%) +4 cohorts 1 MenWomen NCDS13% (1977)14% Birth cohort NCS7018% (1989) 2 30% Birth cohort Across the 2 cohorts, for men has been remarkably constant while for women has fallen dramatically, to be similar to that for men. Supports hypothesis that compositional changes important.

March 17th 2010Nottingham22 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 Arcidiacono 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 17th 2010Nottingham23 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 17th 2010Nottingham24 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 17th 2010Nottingham25 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 17th 2010Nottingham26 Average occupational earnings by subject field and degree class for the 1993 cohort MALESFEMALES MeannMeann Degree Class I II II III

March 17th 2010Nottingham27 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 17th 2010Nottingham28 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.

March 17th 2010Nottingham29 Conclusion Observed changes across cohorts in returns to degrees by gender and in returns by class of degree awarded are consistent with the hypothesis that graduate expansion is the driver, mediated through the implied changes in ability composition across education groups. Future work aims to examine how these patterns: (i) have continued to evolve for later cohorts and (ii) behave over time (with tenure/experience)