Do UK higher education students overestimate their starting salary?

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Do UK higher education students overestimate their starting salary?

John Jerrim

Institute of Education, University of London

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Motivation – UK HE policyChange to higher education finance

Potential market-place in higher education (tuition fees vary by subject and institution)

Higher education becoming more and more of a financial decision

Are 17/18 year olds able to make a reasonable assessment of their labour market future? Do they hold enough information?

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Motivation – academic literature

In economics, there is a large literature on the returns to education & graduate wages.

HOWEVER…..

Very little research on how much students expect to earn after university.

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Motivation – economic model of schooling choice

Econometric models of schooling choice (e.g. whether to go to university, what subject) usually invoke the “rational expectations” assumption.

Assume that there is no systematic difference between young people’s expected return to their schooling decision and what their actual return is:

Re = Expected returns to education

Ra = Actual returns to education

“

R R ae

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Motivation

Some of the best economists have written things in the past that would suggest that this assumption is unlikely to hold:

But little research in this area (and none in the UK).

No data source that provides information on expected returns to education (Re).

So in this paper I look at expected wages (We).

“young persons are especially prone to overestimate their ability and chance of good fortune” Becker

“The contempt of risk and the presumptuous hope of success are in no period of life more active than at the age at which young people choose their professions.” Adam Smith

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Research Questions

1. Do higher education students over-estimate their first wage after university (on average)?

2. Does the extent of this over-estimation differ between different groups?

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DataIdeally have “longitudinal” data – follow the same children

over time

No such data available in the UK (or in other countries)

Use two data sources. One that collects information on wage expectations, the other on actual graduate wages.

Compare average wage expectations to average wage outcomes.

These data sources need to be comparable as possible

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Data source for wage expectations

2004/05 Student Income and Expenditure Survey

*Face-to-face interviews between January and March 2005

*Two stage sample design

*Designed to be nationally representative

*Weighted for non-response

“As can be seen, this was an ambitious methodology but one which succeeded in producing the objective of a nationally representative student

sample for interviews.” SIES report

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Question: Wage Expectations

“What sort of salary do you expect to be earning in the first job you take once you have graduated?”Interviewer comments: If not sure of the exact amount, please give your best estimate.

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Data source: Actual Wages2004-05 HESA Destination of Leavers Survey:

An attempted Census of all graduates 6 months after finishing university

Pro:Question on salary a good match for SIES question on wage expectations:

“What was your annual pay to the nearest thousand £, before tax?” Please estimate your pay to the full-time annual equivalent.

“What sort of salary do you expect to be earning in the first job you take once you have graduated?”

Con:

Non-response to question on salary in DLHE (only 35% of all students).

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IssuesTwo surveys may differ in terms of composition due to non-

response in DLHE

Try to take this into account by creating a set of response weights

Apply these throughout my analysis

Also check how the two surveys compare in terms of observable characteristics

Also use an alternative dataset (LFS) to check the robustness of results

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 Full-Time StudentsExpectations

(SIES) %Realisations (DLHE) %

Gender Male 46.5 43.2Female 53.5 56.8Ethnicity White 86.7 86.5Asian 5.6 7.9Black 2.4 1.6Mixed/Other 5.4 4.0University Group Pre-1992 47.2 45.7Post-1992 52.8 54.3Social Class (Parents Occupation)Managerial/Professional 60.0 56.5Intermediate 20.1 28.1Routine/Manual 19.1 15.3

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Results: Full-time studentsD

ensi

ty

10000 20000 30000Salary £

Actual Salary Expected Salary

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Results: LFSD

en

sity

10000 20000 30000Salary £

Actual Salary Expected Salary

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Results: Part-time studentsD

en

sity

10000 20000 30000Salary £

Actual Salary Expected Salary

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Does the accuracy of students’ wage expectations depend on the subject

they study?

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EducationD

ensi

ty

10000 20000 30000Salary £

Actual Salary Expected Salary

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Engineering, maths, computer scienceD

en

sity

10000 20000 30000Salary £

Actual Salary Expected Salary

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History, English and LanguagesD

en

sity

10000 20000 30000Salary £

Actual Salary Expected Salary

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Additional results

(1) I have shown above that there are differences between subjects.

In the paper, however, I show that this varies within institution

Biggest difference between average expectations and attainment for those at “modern” institutions

(2) Those who are about to graduate make better predictions than those who have just entered higher education

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Discussion

Some students may mistakenly choose to go to university, who will not receive the benefit they expect on enrolment.

Efficient markets require those making the investment to understand the risk/ rewards

Are young people able to make such rational assessments of the future?

Do we need to provide young people with more information?

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Discussion Example

‘I felt this degree was a total waste of time; I was a self-funding student, which was a waste of money. I’m still paying for it now, I’m a single parent and to be honest it was the biggest waste of time and money that I’ve ever spent’.

……..everyone tells you if you do a degree the world will be your oyster, you’ll earn loads of money. No’.

Class of ‘99 Report Page 194

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Conclusions

UK higher education students overestimate their starting salary by, on average, 10-15%

This varies, however, between groups.

Full-time students who have just entered higher education, and those studying an Arts, Social Science or Humanities course at a modern institution, make particularly poor predictions of their labour market future