Degree wage premium in decline since 2010, finds study

The pay-off from post-school education has deteriorated over the past 15 years and will decline further amid a policy push to increase tertiary participation, an Australian analysis suggests.

Research by Vietnamese-Australian economists has found that the “private returns” from post-school education – tertiary graduates’ pay and employability advantages over counterparts with no post-school qualifications – have diminished since peaking around the time of the 2008 financial crisis.

Enhancements to private returns during the first decade of the century have been wiped out since then, with graduates less ahead of the game in 2024 than they were in 2001.

The analysis uncovered considerable volatility in the years in-between, with higher education graduates typically earning 53 per cent more per hour than their unqualified peers in 2010 – up from 40 per cent in 2001. But by 2024, the wage premium had crashed back down to 38 per cent.

The premium for vocational training graduates had followed a similar trajectory, rising from 10 per cent in 2001 to 14 per cent in 2011 before slumping to just 2 per cent in 2024.

Measured by weekly income rather than hourly wages, the premium reached its “peak year” in 2008, suggesting that the decline had been driven by a contraction in working hours as well as pay rates.

The researchers analysed 24 waves of annual data from the Household Income and Labour Dynamics in Australia survey, which tracks at least 17,000 Australians a year, and concluded that ballooning graduate numbers had produced a “saturation effect” in the labour force.

The tertiary-qualified share of 25-64-year-old workers had rocketed from 51 per cent in 2001 to 76 per cent in 2024, reducing the “scarcity” of highly educated workers and the wage “premium” they could command – “especially in regions where tertiary enrolment has surged without corresponding labour market demand”, the researchers report in the International Review of Economics and Finance.

Similar trends have been found in China, Malaysia, Portugal and Vietnam, they said.

The paper speculates that “declining instructional quality, outdated curricula and inadequate infrastructure” in tertiary institutions may have detracted from “the productivity-enhancing potential” of education. The low productivity of the “labour-intensive” service industries that have monopolised employment growth in recent decades – areas like healthcare, social assistance, education and hospitality – could also have suppressed the wage premium for graduates.

Technological change could also have shifted employers’ needs away from the “routine capabilities” taught in universities and colleges. A “mismatch” of skills, with hordes of humanities, arts and social science graduates emerging into a labour market more interested in technical capabilities, could also have contributed to the decline.

Survey data reveal considerable underemployment, both in the skill requirements of jobs and the amount of work they offer, the paper says. “Many graduates begin in non-degree roles, suppressing early-career returns.”

Lead author Tinh Doan, a senior economist with the South Australian Centre for Economic Studies at Adelaide University, said the wage premium for higher education graduates had been declining by about one percentage point a year for the past 15 years – and roughly double that if working hours were factored in.

Doan said shorter average working weeks appeared to be “set in” to the Australian labour force, as people gravitated into areas like hospitality and care where full-time jobs were relatively scarce.

He said assurances about the economic pay-offs from degrees often failed to acknowledge the “downward trajectory over the last 15 years”. Nevertheless, higher education still offered an overall advantage, both economically and in “social benefits” – an aspect the study was unable to investigate.

“Higher education remains a worthwhile investment, but the margin of advantage has narrowed noticeably,” he said. “If the [Universities] Accord’s 80 per cent [tertiary participation] target is to deliver real economic value to young Australians, higher education policy must be closely aligned with broader industrial strategies that create high-productivity, high-skilled jobs capable of absorbing a mass-credentialed workforce.”

Doan said he hoped to repeat the research with data that allowed him to track salary premiums in different demographic cohorts – to gauge the influence of migrants, for instance – and fields of study. He said people undertaking tertiary education really needed to pursue fields that met their employment needs as well as personal interests.

The paper says a decline in wage premiums should be considered a natural outcome of the accord’s participation target. But that is not all bad, Doan said. “A narrowing income gap…might be viewed as a positive step toward social equity rather than a failure of economic return,” he observed.

john.ross@timeshighereducation.com