Labour Market Returns to Higher Education

The persistent high wage premium associated with college education, despite increasing participation rates, continues to generate a great deal of academic and policy interest. While it is widely agreed that the financial benefits associated with college completion outweigh the costs, modelling and empirically estimating the returns are complicated. A simple theoretical framework on educational investment illustrates the decision-making processes and key factors, such as expected returns, that guide the choice of an individual to engage in higher education and to achieve an optimal level of educational investment. Broadening the investment model, however, is instrumental to account for potential heterogeneous returns to higher education – the variation in returns by institution, field of study, and students' background characteristics, among others – and to recognise the wider societal benefits of higher education, beyond private returns. The challenges involved in estimating the returns to higher education, and the heterogeneity in returns, are central in the discussion. Interpreting a naïve correlation between education and wages is complicated by the non-random selection of individuals into higher education, such that individuals who are most likely to benefit from higher education are also those most likely to attend. Advancements in data collection, the ability to track individuals from compulsory education to the labour market, and improvements in econometric methodologies have enabled researchers to causally estimate the impact of higher education on earnings and allow for an improved insight into the disparities in returns to higher education. Recognising the links between students' characteristics (or backgrounds) and associated constraints helps to understand differences in higher education choices. Similarly, identifying differences in labour market returns associated with attending certain colleges or in pursuing particular academic disciplines are as important in shedding light on the complex nature of human capital disparities and the signalling effect of higher education. As the costs of higher education provision constitute an increasingly large share of government spending all over the world, the high returns to college raise questions associated with who should pay for attending college, and the role of the state. Internalizing the social returns to education and their broader implications on the growth and the persistence of inequality complicates this discussion. Higher education funding is one potential policy instruments to influence college attendance and returns. It is not, however, the only one. Better information on returns to education, or access policies that target members of certain social groups, might be other potential tools to overcome constraints.