The Return to a University Education in Great Britain
O'Leary, Nigel C., Sloane, Peter J., National Institute Economic Review
In this paper, we estimate the rate of return to first degrees, Masters degrees and PhDs in Britain using data from the Labour Force Survey. We estimate returns to broad subject groups and more narrowly defined disciplines, distinguishing returns by gender and controlling for variations in student quality across disciplines. The results reveal considerable heterogeneity in returns to particular degree programmes and by gender, which have important policy implications for charging students for the costs of their education.
Keywords: education; wages
JEL classification: I2, J0, J3
There has been a substantial increase in the number of individuals obtaining a degree in Britain, beginning in the 1960s, accelerating in the 1970s, slowing in the 1980s and speeding up again in the 1990s. Walker and Zhu (2003) show that the proportion of young people studying fulltime in universities increased from 13 per cent in 1980 to 33 per cent in 2000 and the Labour Government has expressed a desire to see this figure rise to 50 per cent. This in turn has raised the issue of how the increase in the age participation rates in higher education is to be financed. In the White Paper The Future of Higher Education (DfES, 2003), the Government announced its intention to introduce from 2006 a new Graduate Contribution Scheme under which universities would be allowed to charge fees up to 3,000 [pounds sterling] per year for each course with payments by students deferred until after they had graduated. Payments after graduation would be through the tax system, linked to ability to pay with the threshold at which graduates would have to start repaying their fee contribution and maintenance loan fixed at 15,000 [pounds sterling]. However, the proposed policy does not distinguish between different types of degree programmes, which may offer different potential returns or different institutions where the same considerations apply, though some institutions may choose not to increase fees to the maximum level allowed.
Set against this changing institutional backdrop, we will estimate the current returns to different degree programmes so that a picture can be painted of the pattern of returns that future graduates are likely to receive. This will be done for men and women separately using data drawn from the Labour Force Survey over the period 1994 to 2002. We depart from earlier studies in a number of ways. Firstly, we include a measure of ability in our analysis to control for potential heterogeneity in students across degree subjects. We also provide an investigation of the returns to postgraduate study (at both the Masters and Doctoral level) disaggregated by broad subject area. This entire analysis is conducted within a framework in which earnings premiums are generated using a multi-equation approach. The conventional approach to measuring degree mark-ups has been to include a dummy variable within a single equation (see Walker and Zhu, 2003 inter alia), but our approach uses a less restrictive multi-equation framework. Whilst such a superior methodology is well established in, for example, the discrimination literature, it has not been employed in the existing literature on returns to educational qualifications. Finally, we will conclude by drawing out some of the implications for policy that arise from our results. (1)
2. Previous work
Most studies do not control for field of study despite the fact that returns vary substantially across disciplines. This is at least in part a consequence of the fact that few data sets differentiate type as opposed to level of study. As Harkness and Machin (1999) note, returns to fields of study may be influenced by changes in the numbers entering particular degree programmes. Thus, while the number of graduates overall increased between 1980-2 and 1993-5, the proportion studying in Arts fell from 15 to 11 per cent for men and from 38 to 25 per cent for women. …