Human Resources and Skills Development Canada
Symbol of the Government of Canada

Human Resources and Skills Development Canada

www.hrsdc.gc.ca

Education and Early Labour Market Outcomes in Canada - December 2007

2. Literature Review

Over the last three decades, there has been much work on establishing the economic returns to education [see Card (1999) for a recent survey of results and Heckman et al (2005) for a critical assessment of the existing literature on the returns to education]. It has been reported that the average marginal return is somewhere between 5% and 10%, depending on country and methodology. The average marginal return describes the average effect on wages when increasing educational attainments with one unit (typically a year). While estimates of the average marginal return provide some insight into the link between productivity and education, it ignores some potentially important aspects of how education and productivity are related. For instance, it is likely that the economic returns vary with accumulated education. Most educational systems are structured around a finite number of degrees, such as high school and university degrees. It is thus unlikely that the marginal return associated with the 10th year (occurring while in high school) is the same as that associated with completing the 12th year (normal high school graduation).

Focusing on how the return to education changes with accumulated education, Belzil and Hansen (2002) provide grade specific returns to education using a structural model in which the choice of duration of studies is endogenous. Their results indicate that the marginal returns to education are highly dependent on the duration of studies. The marginal return to years spent in college or university is significantly higher than those to years spent in high school. Belzil and Hansen (2002) also show that the average return to education within this framework is lower than what have generally been found using reduced-form models. The reason for this difference is that the hypothesis of constant marginal returns across different levels of education, assumed in most reduced form studies, is not supported by data.

Among reduced form studies, a number of recent papers have investigated the return to different forms of PSE. Boothby and Drewes (2006) found that while the earnings difference between high school graduates and those with a non-university PSE (community colleges, trades institutions, and other vocational educations) is significant and increased between 1980 and 1995, it is substantially lower than the earnings difference between high school graduates and university graduates (Bachelor's degree). However, since a university education is more costly than a non-university PSE, the difference in earnings premium somewhat overstates the differences in return (the internal rate of return) to respective education.

Hansen (2006) used data from the three most recent Canadian Censuses (1991, 1996, and 2001) to investigate differences in earnings for high school and university graduates. The earnings differences were represented by the internal rates of return between high school and university graduates. When aggregated across disciplines and regions, the results suggested existence of significant returns as well as a modest increase between 1991 and 2001, from 9% to 11%. Moreover, using data from the National Graduates Surveys, Hansen (2006) found that the earnings differences between trade schools/college graduates and university graduates decreased during the 1990s and that there are substantial differences in the returns to a university degree across disciplines.

Burbidge et al (2003) reported estimates of the earnings difference between university graduates and non-university graduates for Canada for the period 1981 to 2000. Their findings suggest that the earnings premium associated with a university education decreased for both males and females during the 1990s. They also report higher "returns" for females (ratio of earnings of university graduates to earnings of non-university graduates) than for males, the ratio in 2000 is around 150 for females and 135 for males.

Ferrer and Riddell (2002) used data from the 1996 Canadian Census to estimate the return to different educational degrees. Their specifications recognize the fact that there might be earnings increases associated with increases in years of schooling as well as earnings increases associated with obtaining a degree. Their results suggest significant earnings differences between high school graduates and high school dropouts, the differences are around 12-16 %. The earnings difference between high school graduates and university graduates is also significant and even higher, between 36 and 47 %.

Vaillancourt (1995) presents estimates of internal rates of return to different levels of education using data from the 1986 Canadian Census. The estimated returns to a university education (Bachelor's degree) relative to completion of secondary education are 8.3% for men and 18.8% for women. Vaillancourt (1995) also presents internal rates of return by fields of study and he finds large variations across disciplines with high returns in "Commerce", "Science", "Engineering", and "Health".

Finally, Lemieux (2006) showed that there was a dramatic increase in the return to post-secondary education in the U.S. between 1973 and 2005. Lemieux (2006) also showed that this increase in return to higher education was the main reason for the increased wage inequality during that period. This suggests that the demand for high skilled workers increased substantially during this period while demand for other types of skills changed very little.

To summarize, a number of studies have documented the existence of significant earnings gains associated with acquiring education. It also appears as if the earnings gain is larger for more advanced studies and that the earnings premium associated with high school graduation is lower than that associated with graduation from a PSE program. Finally, the literature has documented that the return to PSE has increased over the last 20 years.

It is clear that much of the literature has focused on the link between education and earnings. However, there are also other aspects of the effects of education that should be considered. For instance, much work has focused on the effect of schooling on hourly wages and less attention has been paid to the effect of schooling on employment rates. One important aspect of education may indeed be that it reduces the likelihood of experiencing unemployment (or non-employment) and therefore increases life-time incomes, even if the effect on hourly wages is relatively small. The basic human capital model predicts that education will be acquired if the expected life-time earnings (discounted to present value) from this exceed those of not acquiring additional education. Thus, in order to assess the returns to education, researchers should not limit their attention to wages only, but also consider effects on employment patterns. For example, Hansen (2006) found that the probability of being unemployed was significantly lower among male university graduates than among trade school/college graduates in the 1990s.

Footer

Date Modified:
2008-01-24