The labour market returns to apprenticeships in England

One of the Labour Party's policies in the lead up to the New Zealand election was a shift to free apprenticeships. A reasonable question is whether apprenticeships pay off for students - are they better off doing an apprenticeship than not? A recent article by Chiara Cavaglia, Sandra McNally, and Guglielmo Ventura (all London School of Economics), published in the journal Oxford Bulletin of Economics and Statistics (open access), looked at the labour market returns to apprenticeships in England.

One of the challenges of this type of research is determining the counterfactual - what would have been the labour market outcomes for young people who completed an apprenticeship, if they hadn't complete the apprenticeship. Of course, we can't know for sure, so the empirical strategy is really important. Cavaglia et al. compare:

...people with the same highest level of vocational qualification (Level 2 or Level 3), some of whom started an apprenticeship (the treatment group) and others who did not (i.e. the comparison group achieved their vocational qualification only within a classroom setting).

Even with the right comparison group, a basic comparison between the groups in (for example) labour earnings, would not tell you whether it was the apprenticeship that caused the difference in earnings. To identify the causal impact of apprenticeships, Cavaglia et al. use an instrumental variables approach, using as an instrument the extent to which each young person's school peers undertook an apprenticeship. This approach also has the advantage of overcoming bias due to unobserved variables like each young person's non-cognitive ability or motivation. As they describe it:

One way to address causality is to make use of variation in the probability of starting an apprenticeship that is not otherwise correlated with earnings. A plausible source of variation is (within school) cohort-to-cohort variation in the extent to which peers take up apprenticeships between the age of 16 and 18. This variation might exist because of increased exposure to information about apprenticeships via peers in the same grade... In this context, having a friend who starts an apprenticeship might provide additional information on opportunities, the application process and on future prospects.

So, young people are more likely to undertake an apprenticeship if their peers do so, but their peers undertaking an apprenticeship shouldn't affect the young person's labour market outcomes directly. That makes it a suitable instrument. Using this strategy, and linked education and tax records data for all cohorts of students in England who left schooling (at age 16) between 2002/03 and 2007/08 (about 17 million observations), Cavaglia et al. find:

...a very strong relationship between starting an apprenticeship and log earnings at age 23. For men, apprenticeships raise earnings by 30% and 46% for those educated up to Levels 2 and 3 respectively. For women, they raise earnings by 10% to 20% for the respective groups.

However, they find that the earnings premium for an apprenticeship is much smaller (but still significant, especially for men) by age 28. Much of the gender difference in returns is due to differences in the industries in which men and women undertake apprenticeships. Specifically:

There is relatively little overlap in the most popular ten sectors for men and women. Where there is overlap, the earnings premium to having started an apprenticeship tends to be higher for men: at Level 2 - Administration (20% v 6%); Retailing and Wholesaling (12% v 9%), Sports, Leisure and Recreation (11% v 8%); at Level 3 – Administration (21% v 5%), Business Management (25% v 14%), Sport, Leisure and Recreation (24% v 11%). Since we observe a gender earnings gap within sectors that are popular both among men and women, the sector of vocational education cannot entirely explain why the earnings premium to having started an apprenticeship is higher for men than for women.

The gender gap in the returns to an apprenticeship persists after controlling for the industry that the apprenticeship was in, as well as employer characteristics. More research is clearly needed if we want to understand this gender gap.

Overall though, it is clear that the benefits of apprenticeships, in terms of labour market returns, are high, for both men and women. The paper doesn't evaluate whether those benefits outweigh the costs, but if the costs to students are zero (as they soon may be in New Zealand), you can be sure that the private benefits exceed the private costs.