1. 9th March 2011University of Sheffield1 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 ability composition of different educational groups – has received relatively little attention

2. 9th March 2011University of Sheffield2 2.Context HE API in UK shows rapid expansion after mid-1980s, with growth especially dramatic for women. See Figure 1.

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5. 9th March 2011University of Sheffield5 3.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

6. 9th March 2011University of Sheffield6 4.Heterogeneity in ability Consider the simple case of two ability types and increased participation stemming from a reduction in costs associated with education: ssHsH r S 1 =MC 1 sLsL DLDL DHDH

7. 9th March 2011University of Sheffield7 A fall in costs can produce a change in the ability composition: (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

8. 9th March 2011University of Sheffield8 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.

9. 9th March 2011University of Sheffield9 Assume: Within a cohort: Across cohorts:...

10. 9th March 2011University of Sheffield10 Across cohorts:

11. 9th March 2011University of Sheffield11 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.

12. 9th March 2011University of Sheffield12 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.

13. 9th March 2011University of Sheffield13 5. 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 66-68 vs 75-77: 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)

14. 9th March 2011University of Sheffield14 (iii)What can we learn from the birth cohort studies in Britain? HE APIHE API (%) +4 cohorts 1 MenWomen NCDS13% (1977) 14%12-1834-38 1958 Birth cohort BCS70 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. 18% (1989) 2 30%1518

15. 9th March 2011University of Sheffield15 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).

16. 9th March 2011University of Sheffield16 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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18. 9th March 2011University of Sheffield18 6. 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.) The question we address is: how is da/ds likely to change following an increase in the HE API?

19. 9th March 2011University of Sheffield19 Theory As HE API increases, da/ds rises and this causes the estimated premium for a distinction to rise, cet. par.. (nb: assume initially that d constant). Result robust to distributional assumptions. Is this consistent with empirical evidence?

20. 9th March 2011University of Sheffield20 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)

21. 9th March 2011University of Sheffield21 USR data, summary statistics for those in employment based on the 1993 cohort (continued) VariableMean Mean Degree ClassMalesFemales First (I)0.100.07 Upper Second (II.1)0.450.55 Lower Second (II.2)0.330.32 Third (III)0.070.03 Sample size (n)1947619978

22. 9th March 2011University of Sheffield22 Average occupational earnings by subject field and degree class for the 1993 cohort MALESFEMALES MeannMeann 450.2819476333.1019978 Degree Class I480.141909351.311309 II.1465.258791338.4410982 II.2432.626471322.586381 III408.411344319.06642

23. 9th March 2011University of Sheffield23 Selected Results of occupational earnings equation for the 1993 cohort MALES FEMALES VariableCoeff Coeff Degree class I0.038 *** 0.037 *** II.1 (default) II.2-0.054 *** -0.042 *** III-0.094 *** -0.053 *** Other-0.080 *** -0.079 *** 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%

24. 9th March 2011University of Sheffield24 Degree class coefficient estimates for the 1985-1993 and 1998 cohorts 1985 1986 1987 1988 1989 1990 1991 1992 1993 1998 Males I0.003 0.006 -0.007 -0.006 0.001 0.027 0.027 0.042 0.038 0.046 II.1 (default) Females I0.012 0.012 0.018 0.028 0.026 0.033 0.025 0.053 0.037 0.067 II.1 (default) Why is this an interesting time period? Because of what was happening to HE API over this period. 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, = 0.64. 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.

25. 9th March 2011University of Sheffield25 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 an important 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)