Every lawyer has to have a law degree, and every doctor has to have a medical degree. So there is no signalling benefit from the degree itself - a student can't signal their quality as an employee with the degree, because all other applicants will have a degree too. The quality of the student then has to be signalled by the quality of the institution they studied at, rather than the degree itself. An effective signal has to be costly (degrees at top-ranked institutions are costly) and more costly to lower quality students (which seems likely in this case, because lower quality students would find it much more difficult to get into a top-ranked institution).A new article by David Carroll (Monash University), Chris Heaton (Macquarie University), and Massimiliano Tani (UNSW Canberra), published in the journal The Economic Record (possibly ungated, but just in case there is an ungated earlier version here), looks at how big the premium is for studying at a top university (compared with lower-ranked universities). Specifically, they used data on the earnings of Australian students collected in their Graduate Destination Survey 2013-2015. They compared the earnings for different fields of study across universities, focusing on comparing the Group of Eight (Go8) research-intensive universities (Australian National University, Monash University, the University of Adelaide, the University of Melbourne, the University of New South Wales, the University of Queensland, the University of Sydney and the University of Western Australia) with other universities. They grouped the other universities into Go8, ATN (five former institutes of technology), NGU (New Generation Universities - all former colleges of advanced education) and 'Other'.
They expected to find that graduates of the Go8 earned significantly more, for two reasons:
If institutional factors such as student-to-staff ratios and faculty qualifications are important in the human capital production function, then graduates of ‘better’ institutions (i.e. those with more favourable ratios) should be paid a premium due to their enhanced productivity relative to their peers. Under a signalling interpretation (Spence, 1973), employers, believing that attending a prestigious university is correlated with productivity, will pay a premium to graduates from these institutions, especially when institutional quality is more visible to employers than individual productivity, as is the case for recent graduates with limited work histories.Unfortunately, they can't easily disentangle the pure human capital premium from the signalling value. A further issue with this type of study is selection bias - the types of students that go to top universities are meaningfully different from the types of students who go to other universities. The students going to the top universities tend to be better motivated, more conscientious, and harder working, and so you'd expect them to earn more after graduation regardless of where they graduated from. Carroll et al. deal with this issue by controlling for the average university admission scores (Australian Tertiary Admission Ranks or ATARs) of each field of study. Because they don't have individual-level ATAR scores, they run their analysis at the field-of-study level. They find:
...statistically significant evidence of Go8 premia for graduate starting salaries, once selection by ability (as measured by the ATAR of accepted students) is taken into account. The magnitudes of the unconditional premia are fairly small, ranging from 4.3 to 5.5 per cent, and we estimate that between 45 and 65 per cent of these premia are due to variations in fields of study and gender balance, regional wage differences, and the recruitment of better-quality students by the Go8.In other words, there is a premium for studying at a Go8 university. However, the premium is small, and once you account for differences in the types of students who go to Go8 universities and those that go to other universities, the premium falls to around 2 percent. That's certainly much lower than I expected. It made me wonder whether there is a lot of heterogeneity in the premium by field of study (e.g. is the Go8 premium larger for economics and business, or science, or something else?), but we don't find out from the paper.
There are some clear limitations. They drop the data from the University of Melbourne, which is (by some measures) the top ranked of the Go8 universities. That would suggest the results may be downward biased. They also drop data from students who went onto further (postgraduate) study, presumably because those students were not in the workforce at the time of the Graduate Destinations Survey. To the extent that graduates with postgraduate study earn more than graduates with bachelor's degrees, that might also downward bias the results, if Go8 students are more likely to go onto postgraduate study.
What we can take away from this study is clear. University ranking matters, but maybe it doesn't matter quite as much as we previously thought?
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