What’s going on with graduate earnings?

Jenny Macklin is using the latest OECD Education at a Glance to give the Howard government a ‘F’ for higher education. She says that:

??The Report … shows Howard Government HECS hikes mean Australian university students are now paying the second highest fees in the world.

Fees paid by Australian students are now second only to the United States ??? a higher education system which John Howard is hell-bent on copying here.
??

But if, as Labor MPs are fond of pointing out when it is taxpayers’ money being spent, education is an ‘investment’ then what matters here is not just what students spend, but what they get in return for their money. One reason US universities have been able to charge relatively high sums is that the income premium from having a degree is high in America compared to other countries. In Education at a Glance it is put at 81% more than people with ‘upper secondary and post-secondary non-tertiary education’, while Australian graduates in 2001 earned only 43% more. Australia’s high minimum wage is part of the explanation, but perhaps also a disinclination by Australian employers to pay too much for the standard-product Australian graduate.

Without any politicians noticing, the ABS has recently issued the latest Education and Training Experience survey, which we can compare with earlier surveys. Intriguingly, this suggests that the income premium for bachelor degree only holders over people with Year 12 education only (I can’t replicate the OECD comparison on the published figures) went down between 2001 and 2005, from 50% to 47%. Using the RBA’s handy inflation calculator I estimate that average full-time bachelor degree holders’ income went up in real terms by a miserable $4 a week in those years, compared to $21 for people with a Year 12 education only (2005 $).

What could be causing this sluggish performance in a strong economy? It is true that universities and the immigration department continue to push up the number of graduates in the economy. As the ABS Education and Work survey shows, the share of the workforce with a degree increased by about two percentage points in those years. And while the absolute number of graduates working in jobs that are very unlikely to require degrees increased by about 40,000, that was a slight decline in the overall percentage.

One possible explanation is not that under-utilised graduates are pulling bachelor-degree average earnings down, but that higher-income earners are being increasingly counted elsewhere, among those with a postgraduate degree as their highest qualification.

Like that other deregulated ‘US style’ market, overseas students, postgraduate enrolments have boomed over recent years. As DEST’s data shows, postgraduate course completions more than doubled between 2000 and 2004. And unlike bachelor degree holders, their weekly income did increase significantly between 2001 and 2005, by $86 a week.

This is probably not just the return on their human capital investment; it is also likely to be related to experience. Compared to 2001, the proportion of 45-54 year olds in 2005 with a bachelor degree as their highest qualification went down, while the proportion with a postgraduate degree went up. In the 35-44 age group both groups went up as a proportion of the total, but the postgraduate degree group grew more. So weak bachelor degree only earnings growth is partly because compared to the past they are, on average, a younger, less experienced, and perhaps less able population.

10 thoughts on “What’s going on with graduate earnings?

  1. “Perhaps less able”? Maybe, but I would have thought you’d need finer levels of disaggregation before you could assume that. I notice from your link that gender is a significant factor – with more women in undergraduate higher ed we seem to be getting more women with bachelors degrees only than men, and possibly a shift in the professions the bachelors lot are working in, and the earnings profile would reflect that too, wouldn’t it?

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  2. An additional factor based on your observation about PG vs. UG degrees is that rather there being just differences in experience and ability, it may also be that employers now prefer people with PG degrees more in some situations, and that may simply be due to a new cultural norm vs. actual ability (a side effect of post-graduate degree proliferation). In this case, the extra money paid for the greater number of people with PG degrees would simply subtract from the people with just UG degrees.

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  3. Robyn – Gender is probably a factor, though I will need to check to what extent female-majorities among graduates are affecting the full-time workforce – full-time female labour force participation has not increased that much over time.

    Conrad – Some of this could just be signalling, ie employers take p/g qualifications as a reasonable proxy for higher ability or other qualities they value, and potential employees respond. In the Education and Training survey there was a question about why a course was undertaken, and the single most common answer for p/g students was to get a better job or promotion.

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  4. Andrew you mentioned the US stats. I really don’t think the US is a very good comparison for one prime reason. US wages at the bottom rungs of the ladder are pulled down by the high levels of illegal immigration. There are approx 11 million low skilled illegal workers in the US. This has a very big effect on wages for the low skilled American

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  5. Its difficult over such a short-term period to make a judgement. The 2% figure in growth of employed graduates sounds high to me over such a short term period – this might alone account for the lid on earnings.

    I also think the quality of undergraduate education is deteriorating – rising class sizes, fewer essays, vastly increased prevalence of intrusive part-time work while studying etc will increasingly mean the ‘human capital’ investment decisions (I prefer ‘education’) yield lower returns.

    Students are getting an increasingly shoddy deal from the Australian Universities.

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  6. Harry – I can see the theory behind your point about the quality of u/g education, but if there is lower quality it does not seem to be reflected yet in starting salaries. So if you are right, employers after observation are less likely to award pay increases.

    JC – I’m not sure that it matters for the argument why US wages are low for unskilled people; the simple fact that they are will encourage people to seek further education despite the initial cost.

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  7. I thought your argument was that the premium for graduates was lower. Do you have evidence that starting salaries have remained high but average incomes for graduates have fallen? I’d be surprised.

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  8. Frederic Pryor (Who’s not working and why (1999)) argues that in the US there has been downward mobility with university graduates with lower cognitive skills taking jobs from the high school educated whilst university graduates with higher cognitive skills are benefitting from economic change.

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  9. Harry – According to the survey conducted by Graduate Careers Australia a few months after course completion, the median (they do not provide the average) starting salary for graduates went up $20 a week in real terms between 2001 and 2005 ($ 2005). By contrast, the ABS stats indicate that for bachelor degree holders overall average wages went up by $4 a week. I did not say they were falling overall, just that their growth was very slow compared to other groups.

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