Learning and earning

The payoffs of higher education

Youngmin Park
Youngmin Park
Gabriela Galassi
Gabriela Galassi
Natalia Kyui
Natalia Kyui

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We often hear that school days are the best days of our lives. But do all these years of education pay?

More than just university

There are several types of higher education:

  • university (bachelor’s degree or higher)
  • college
  • trades school and apprenticeship

A growing number of Canadians are getting some type of higher education. In fact, over the past 20 years, the pursuit of higher education has increased substantially, particularly at universities:

  • In 1997, 15 percent of the working-age population (ages 15 to 64) had a university degree and 29 percent had some other higher education certification.
  • By 2018, these numbers had increased to 28 percent and 33 percent.

Does higher education actually pay?

One way we measure the payoffs of higher education is to compare average wages for workers who got a higher education with those of workers who didn’t. This difference in average wages is what we call the “wage premium.”

Let’s look at an example using data from Statistics Canada. We focus on adults in their 40s because they have likely established their careers and have not yet started phasing into retirement.

In 2018, workers in their 40s with higher education earned, on average, more than those without any higher education:

  • university degree—53 percent (Can$13) more per hour
  • other higher education—18 percent (Can$4) more per hour

School pays, but less than it used to

Wage premiums for higher education are substantial, but they have been falling over the past 20 years.

In 1997, the wage premium was 63 percent for a university degree, and it was 20 percent for other types of higher education.

Why wage premiums are dropping

Let’s consider the theory of supply and demand of labour in a world where there are separate jobs for workers with different levels of education. In that scenario, the wage premiums are determined by demand for and supply of highly educated workers compared with workers with less education. Imagine now that the number of workers with a higher education grows, while everything else remains the same.

What happens to the wage premium? It drops because, at the current wages, there are more educated workers than there are jobs. This pattern—increasing supply of educated workers and falling wage premium—is consistent with reality, that is, what we have seen in the data.

For workers with a university education this pattern is more pronounced. Compared with other types of higher education, the overall number of workers with a university degree increased more rapidly, and the wage premium for these workers declined faster.

Of course, it’s possible that the demand for workers with a higher education grew as well, but just not as quickly as the supply.

What workers do on the job matters too

Although this theory for declining wage premiums is appealing, things are more complicated in real life. How much more you earn because of your education depends on many factors, such as what skills you take away from school.

Another important factor is your job. Your degree may be more valuable if your job takes advantage of the skills you learned in school.

Although the link between education and job is not so clear-cut, we can expect that university education will be probably more valuable in education-intensive jobs—by that we mean professional jobs such as accountants, doctors, lawyers, engineers, teachers as well as jobs in senior management.

However, more and more university graduates are taking jobs that are not education-intensive.

So, let’s take a closer look at the wage premium for university graduates based on the jobs they’re taking.

We’ll look at wages for three groups of workers:

  • those with a university degree and a job that is education-intensive
  • those with a university degree and a job that is not education-intensive
  • those with no higher education

In both 1997 and 2015, workers with a university degree and an education-intensive job earned wages that were 74 percent greater than those with no higher education. So, the wage premium is high and has held steady for that group.

However, the wage premium is lower for workers with a university degree who did not have an education-intensive job, and it has dropped over time:

  • In 1997, they earned 51 percent more than people without higher education.
  • In 2015, they earned only 35 percent more than people without higher education.

All of this again shows that growth in the number of workers with a university education played an important role. The number of education-intensive jobs is growing, but the number of university graduates is growing even faster. At the same time, more and more university graduates are taking non-education-intensive jobs that were traditionally held by people without higher education. They earn a lower wage premium, and this premium is falling. This results in a decline in overall wage premiums for workers with a university degree.

What’s the final verdict?

Although the wage premium earned on higher education has been declining, it remains substantial. In short, getting a higher education still pays, especially if you land a job that uses your education in your daily activities.

That’s true today, but what about in the future? Changes in how we work may shed some light on how these payoffs may change. For example, people with a higher education may be better able to use tools in the workplace that are based on new technology such as artificial intelligence (AI). At the same time, the knowledge that you gain through higher education may become outdated more quickly in a world of fast technological change, so it may be more important to keep learning throughout your career.

Due to the COVID‑19 pandemic, many Canadians lost their jobs or were forced to work reduced hours. The impacts of the crisis varied for people with different levels of education.

To see this, we again use data from Statistics Canada. We look at prime-age workers (aged 25 to 54) in April 2020, when a substantial part of the economy was shut down to contain the spread of the virus. Since February 2020, about 13 percent of workers have lost their jobs. Most of the losses have been concentrated in jobs that require physical contact and are not considered essential to our daily lives.

For example, around 24 percent of workers in personal service (e.g., salespersons, chefs, servers and cleaners) lost their jobs. In contrast, jobs that can be done remotely (e.g., managerial, business, finance, administration and science) or are considered essential (e.g., health care and front-line public service) were not affected much.

You may notice that the jobs that were less affected by the measures taken to contain the spread of the virus tend to be education-intensive. That is why those with less education were hit hardest by COVID‑19. Around 18 percent of workers without post-secondary education lost their job, while only 8 percent of university graduates lost theirs. But it’s the nature of the job that matters, not the education level itself. Indeed, among university graduates who didn’t have an education-intensive job, 11 percent lost their jobs.

Some argue that the effects of COVID‑19 might be long-lasting. Remote work seems to be here to stay, at least for a while. Similarly, options for remote education are changing who can access education and when. These structural changes might shift how demand and supply for workers with different levels of education evolve in the long run.

More educated workers earn higher salaries on average. But many factors influence your salary and their effects are likely to change over time.

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