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Mastering the wage bargain

27 September 2019|

A sideways look at economics

In a week, I will head back to university to complete a masters degree in economics at LSE. As anyone who has considered a post-graduate degree will know…it’s expensive. Which raises the question, is it worth it? The obvious justification for paying such extortionate fees is labour market signalling and increasing human capital. But will my masters give me improvements in these over and above my undergraduate degree from the University of Surrey? And will it make a difference that I’ll be studying at LSE rather than returning to my alma mater?

There are many ways in which a masters will have an impact on my lifetime jobs market outcomes but the simplest to analyse is salary. Data aren’t widely available on the relative returns to masters degrees by institution. However, granular data is available on the labour market returns to different undergraduate degrees. If these data are accurate in how they represent the returns to masters degrees, they suggest that my decision will turn out to be a good one. Those who get an economics undergraduate degree from LSE are amongst the top earners five years after graduating, with the median earner making £60k per year. Their earnings are only bettered by graduates of Oxford and Cambridge who earn £62k and £77k respectively. However, economics graduates from Surrey also have relatively good labour market outcomes with a median salary of £49k. For good measure, I‘ve highlighted the earnings of the University of Surrey’s varsity rivals Royal Holloway. I’m sure their parties are much better though.

Relative value of economics degrees

But I expect my career to last longer than five years, unless it goes REALLY well, so I need to consider the salary dynamics over the rest of my career. Extrapolating lifetime earnings from the first five years of a career is very speculative…but here goes. Ideally, data would be available on the salaries of different percentiles of the income distribution by age group. This would allow us to broadly capture the impact of changes in experience levels on salary. However, data is only available for the changes in earnings by percentile over time. This actually captures the effect of wage inflation over time and isn’t necessarily related to experience. I estimate[1] that the present discounted value of the increase in future earnings should far exceed the initial cost of the masters, regardless of the assumptions I make about the discounting rate.

Whilst the above analysis is appealing and it’s very tempting to stop, give myself a pat on the back and leave it there, the interpretation is far from causal. Students attending LSE may on average have other factors that make them more likely to earn a higher salary than those who attend Surrey. Given these factors are fixed for individuals, I don’t want to account for these in my decision.

The Institute for Fiscal Studies (IFS) attempts to resolve this using inverse probability weighted regression adjustment (IPWRA)[2] estimates for average earnings. The data aim to present the percentage difference in earnings five years after graduation relative to average for a specific university degree by controlling for prior attainment of students, socio-economic background, region and ethnicity. They show the earnings of the students of a university relative to that which they would be expected to make given the above factors. This can be interpreted as a “value added” score. Controlling for this appears to make an LSE degree even more attractive.[3] On this measure, Royal Holloway students get a greater valued added from their degree than Surrey students.

So, is it worth it? In monetary terms, it certainly appears so. But despite being the easiest outcome to measure, money is by no means the most important. LSE is home to one of the most geographically diverse student communities with 79% of graduate students coming from overseas. The value of expanding your awareness of different opinions, cultures and lifestyles is difficult to quantify but, in my opinion, certain to be positive. For that reason, it’s surely worth it. Even if it doesn’t ‘pay off’.

 

 

[1] The median LSE graduate earns roughly in line with the 93rd percentile five years after graduation. I assume that the median LSE graduate’s grows at the same rates as the 93rd percentile’s salary did over the last 25 years and that the median Surrey graduate earns a fixed share of the median LSE graduate’s earnings (83%) based upon the average gap over the first five years since graduating.

[2] Belfield, C. et al. (2018), The Relative Labour Market Returns to Different Degrees, Report from the Institute for Fiscal Studies.

[3] The data underlying this chart can be explored for different degrees and genders here: https://www.ifs.org.uk/publications/13036.

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