Do UK higher education students overestimate their starting salary?

1. Do UK higher education students overestimate their starting salary? John Jerrim Institute of Education, University of London

2. Motivation – UK HE policy Change 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?

3. 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.

4. 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 “

5. Motivation “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 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).

6. 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?

7. Data Ideally 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

8. 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

9. 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.

10. Data source: Actual Wages 2004-05 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).

11. Issues Two 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

13. Results: Full-time students

14. Results: LFS

15. Results: Part-time students

16. Does the accuracy of students’ wage expectations depend on the subject they study?

17. Education

18. Engineering, maths, computer science

19. History, English and Languages

20. 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

21. 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?

22. 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

23. 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