Written by: Brahim Boudarbat, Thomas Lemieux, and Craig Riddell

The Evolution of the Returns to Human Capital

in Canada, 1980-2005

Analyzed by: Mico Radulovic, Ben May, Dajana Sormaz, Bryan Taylor, and Arjun Arulambala

Returns to education

Returns to experience

Controlling for work experience

Introduction

Existing Canadian literature such as Freeman and Needels (1993) and Burbidge, Magee, and Robb (2002) try to explain the returns to education but are unsuccessful at clearly presenting their findings and leave confusion among the reader.

The existing papers agree upon two main beliefsThe belief that for the labour force as a whole

the gap between more-and less-educated workers remained stable during the 1980s and 1990s

The belief that the relative demand for more educated workers increased since the late 1970s.

Some Background to the Problem

Canadian Census from 1981-2006

Weekly wage and salary earnings of full-time workers aged 16-65

Inconsistency of Survey of consumer finances (SCF)

Restricting study of recent developments

Data Source

Attention focused on the private benefits to the individual in the form of higher earnings and employment

Price dimension is used

Referred to as “skill premium”

Methods

Workers are classified into five groupsless than a high school diplomahigh school diplomapost-secondary degree or diploma below a

university bachelor’s degree (including trade certificates)

university bachelor’s degree postgraduate degree (master’s, PhD, and

professional degrees)

Methods (Cont’d)

Returns to educationHigh school graduate earnings used as baseWorkers are placed into their category

irrespective Both raw or unadjusted and adjusted results

displayedAdjusted results are either controlling for

experience and age or educationDifferent from previous studies, since they do

not controlResults reported based on weekly wages and

salary of full time workers

Methods (Cont’d)

Returns to experience/ageadjusted wage gap are calculated by

regressing log wages on a set of age dummiesthe regression also controls for education using

dummies for the five education categoriesmen aged 46-55 are chosen as reference

category

Methods (Cont’d)

Median measures are relatively unaffected by increases in returns to education by workers in the top part of the wage distribution

Therefore, both means and medians are reported in this study

Results show differences between the two are small

Methods (Cont’d)

Human Capital refers to the skills, knowledge and competencies of individuals.

Two key factors that influence an individual’s Human Capital; Formal education Work experience (age)

Main focus will be the impact of formal education and work experience has on an individuals private benefits.

 Methods to analyze the results

Average treatment effect on the treated (also known as average return)

Marginal return Price dimension Quantity dimension

 Measuring Returns to Human Capital

Returns to Education

Sharp increase in the return for BA graduates over the past 25 years

The earnings of those with postgraduate and professional degrees are fairly stable over the 25-year period

Upward trend in the return to a post-secondary diploma

The earnings difference for high school graduates and men with less than a high school diploma widened in recent years

Returns to Education (Cont’d)

Returns to Education (Cont’d)

For all educational categories except university BA graduates, controlling for differences in experience decreases the return to education

The earnings differential between high school graduates and non-graduates becomes much larger when adjusting for differences in work experience

Younger cohorts are more highly educated, and this generates a negative correlation between schooling and experience

Returns to Education (Cont’d)

Returns to Education (Cont’d)

Returns to Education (Cont’d)

The main differences from the results for men are:The returns to education for women are largerThe adjusted education wage differentials among women were

more stable from 1980-2000, though they did widen between 2000 and 2005

The earnings associated with a post-secondary diploma and a postgraduate education increase throughout the 25-year period

The adjusted gap between high school graduates and non-graduates is stable between 1980-2000, and widens in 2005

Controlling for work experience has the largest effect on those with less than a high school diploma, and the smallest effect on those with a postgraduate education

The adjusted wage differentials also reveal more of an upward trend than the corresponding unadjusted results

Returns to Education (Cont’d)

Returns to Age/Experience

Substantial expansion between 1980 and 1995 in the wage gap between younger workers (16-25) and older workers (26-35)

After 1995, relative wages of younger workers stabilized

Between 1995 and 2000 there was a market reversal of earlier trends as relative earnings increased

After 2000, however, most of this improvement in relative earnings is given up

Returns to Age/Experience (Cont’d)

Returns to Age/Experience (Cont’d)

The large gap in the growth in earnings for younger and older workers is less dramatic when looking at the adjusted results

The reason for this is because of a slowdown in growth in education attainment among Canadian men born after 1950

Returns to Age/Experience (Cont’d)

Returns to Age/Experience (Cont’d)

Returns to Age/Experience (Cont’d)

Similar to the results for men, females have a substantial growth in wage inequality by age over the 25-year period

Between 1995 and 2005, these differentials widen further for women

Although the earnings gap between younger and older workers increases more for women, the magnitudes of these gaps are larger for men

Returns to Age/Experience (Cont’d)

Human capital theory deals with the very nature of what is the optimal choice of education levels

Study suggests that education alone does not determine wage differentials over time

Market wages play an important rolePublic policy should focus on job creation and

increasing incentive to obtain higher education

Relation to Public Policy

Q&A