The Value of Education, Part 1: Changing Returns to Education

As part of our on-going research into understanding the variation in wages and other working conditions around people whose primary work is service-oriented, what we call the Service Class, the Martin Prosperity Institute and the Institute for Competitiveness and Prosperity have looked at the impact of completed education on wage levels. We start with a look at how returns to education have varied in Canada over time. And, while the results support the general expectation that more education equals higher income, some interesting trends have developed over the past 35 years.

We will continue in the next Insight looking at variation in wages by age and occupational class (creative, service, working). Again the high-level results are generally as expected but the more detailed investigation offers some interesting nuance. We will conclude this series by looking at the wage premium for holding a college certificate or degree or a university degree by specific occupations. While most occupations experience a wage premium for college and a greater premium for university, that is not always the case. The holders of many jobs, especially in the service class and some in the working class, benefit more from college than university. Education and experience remain important factors in determining annual income or hourly wage, but the detail offered by these Insights shows some of the potentially complicating factors.

We start with Exhibit 1. Exhibit 1 shows the average inflation adjusted income earned in Canada by level of education completed by Census year (1971–2006, every 5 years). The graph reveals many interesting trends and characteristics of this relationship. First, it should be noted that these are average incomes across the entire population of Canada. So, while the trends are universal in nature, they do not account for specific cases. There will be individuals with university degrees with very low annual incomes and others who haven’t completed high school, but have a tremendously high income. The graph reflects the average performance across the entire Canadian economy and suggests what would be “typical” results.

Although not completely consistent, two different time periods appear in the data. Through 1991, incomes for those without a high school diploma, those with a high school diploma and those with a university degree were all fairly stable. From 1971–1991, incomes for those with a college certificate or degree increased over time. College graduates continued that pattern after 1991. However, university graduates, high school graduates, and those who did not graduate from high school all had their average incomes decrease (slightly).

As of 2006, those who have not completed high school had an average income of $12,800. Graduating from high school increased income by $5,500 to $18,300. Completing a college certificate or diploma program increased income by a further $9,200 to $27,500. Graduating from university increased income by $21,200 over just graduating high school to result in an average income of $39,500. Completing each level of education dramatically increases average earnings.

While holding a university degree still offers the highest possible income, on average, the additional increase has been declining in recent years, and relative to college graduates has been decreasing even faster. In 1971, a university graduate earned nearly twice what a college graduate earned. By 2006 the additional earnings premium for a university degree had shrunk to half of what it had been. University graduates still earn more but now only 50% more. It is doubtful that this trend will continue indefinitely, but it does suggest that the Canadian labour market has been shifting away from university graduates in favour of college graduates. Looking at these relationships in more detail, which we will do in the upcoming Insights in this series will help to better understand what may be driving these trends. It should be noted that when looked at on an hourly wage basis using the Labour Force Survey, 1997–2010, the same pattern does not occur. It may be that college graduates are closing the gap on university graduates by increasing their hours worked more than university graduates.

Clearly a strong financial incentive is associated with completing higher levels of education. And, while that relationship has strengthened over time, especially for completing some education beyond high school, the benefit from a university degree relative to a college certificate or degree is not as significant as it once was. There is still a large and significant income bonus of nearly $12,000 per year associated with a university degree over being a college graduate, but that relationship has been changing. Additional factors need to be investigated to more fully understand the relationship between education and earnings.

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The Martin Prosperity Institute at the University of Toronto’s Rotman School of Management is the world’s leading think-tank on the role of sub-national factors—location, place and city-regions—in global economic prosperity. We take an integrated view of prosperity, looking beyond economic measures to include the importance of quality of place and the development of people’s creative potential.