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Students’ choice of university has no effect on new graduate pay, and a small impact later on. What they study matters more
Every year in Australia school leavers suffer ATAR anxiety, worrying about whether they will get into their preferred course and university.
New research by the Commonwealth Department of Education, using Australian Taxation Office earnings data, examines in detail how much difference what a person studies, and where, makes to their future income.
It finds students’ course choices matter more than their choice of university. Qualifications in some fields of study lead to much higher incomes nine years after graduation. Which university a student attends has little influence on short-term graduate earnings, but differences emerge over time.
Why might graduates of some universities earn more?
We would expect some university effect on earnings. Universities vary in their teaching quality, at least as measured by student satisfaction. In theory, those whose graduates learn more could expect labour market rewards.
Whether justified by objective learning gains or not, some universities are better known and more prestigious than others. This could influence employers when choosing between job applicants.
And some universities, especially those with many full-time and on-campus undergraduates, offer greater networking opportunities. The people met at university could open up employment and business opportunities.
Some degrees are entry points to specific occupations. The pay for those jobs is a major influence on graduate earnings. Other degrees provide more general skills that are valued to a greater or lesser extent in the labour market.
These differences reflect market conditions, occupational regulation and political decisions more than how good either the university or the graduate might be. University and graduate factors can influence who gets hired and promoted, but job markets set the salary range.
What do the department’s results show?
The Department of Education’s graduate income report and accompanying spreadsheets show earnings at various time points after graduation. I will mainly discuss the medium-term results, as at 2017-18 for people who graduated in the late 2000s.
As the chart shows, bachelor degree earnings differ significantly by the field of study nine years after graduation. At the high end, half of medical graduates reported annual incomes of A$149,500 or more (the median). A quarter earned $206,900 or more (the 75th percentile). The equivalent figures for performing arts were $53,000 and $80,300.
The overall results (including fields not shown here) were a median of $77,100 and a 75th percentile of $102,600.
The department’s statistical analysis shows substantial course differences persist after taking into account university attended and personal characteristics such as gender, socioeconomic background and ATAR. For example, compared to business and management graduates, law and engineering graduates earn an extra $11,000 a year.
Much of the apparent variation in earnings between universities reflects differences in enrolment patterns. For example, universities with more graduates in high-paying fields such as medicine, law and engineering end up with higher median earnings than universities that focus on teaching or nursing.
The department’s analysis does show, however, that a decade after leaving university Group of Eight (Go8) graduates earn about $4,300 a year more than others from a comparison group of universities. Australian Technology Network (ATN) university graduates also earn more than non-Go8 graduates. These findings take into account course taken and personal characteristics such as gender, socioeconomic background and ATAR.
Does this change our understanding of graduate outcomes?
These findings confirm general patterns observed in previous research. They do so in ways that give us more confidence in earlier results.
Several studies have found either no or a small Go8 salary advantage for new graduates, after taking into account other factors known to influence graduate pay. The short-term results (one to two years after graduation) using ATO data also report no such advantage.
These findings count against strong prestige effects. If there were such effects, we would expect these to be greatest early in graduates’ careers, before they have had a chance to demonstrate their quality to employers.
Before now, longer-term earnings by university have been very difficult to analyse. Few data sources record both income and university attended more than three years after graduation.
Both these studies found small university and larger course effects on income. The Grattan paper also found Go8 and ATN graduates doing slightly better. The Curtin paper found an earnings disadvantage for regional university graduates, with other university grouping differences not statistically significant.
At the time of the Grattan paper there was some surprise that the university differences were not larger. Given the modest number of graduates in the HILDA sample, including people who finished university at many different times, its findings needed to be checked using other data sources.
The Department of Education’s analysis includes most graduates who finished in the same year. It both provides a much larger sample and lets us compare people at similar points in their career who faced common economic conditions. The strong parallels between the HILDA and ATO-based findings give us confidence the conclusions are right.
Caveats and suggestions
While a significant step forward, the ATO data source has some weaknesses. It relies on students borrowing under the HELP loan scheme to create the link between tax file numbers and enrolment records. The analysis excludes international students and domestic students who paid their fees up-front.
For future work using the ATO data I suggest looking at the effects of local labour markets. After taking into account courses taken and student characteristics, most of the universities showing earnings premiums are in NSW or the ACT.
Have universities there found a special strategy for improving graduate outcomes? Or are there simply more well-paid jobs in Sydney and Canberra? With the Grattan and Curtin papers both finding a NSW premium, the second explanation looks most plausible.
Will student choices change?
The ATO data show significant differences in earnings by course taken, but this is already well-known and probably won’t change students’ course choices. Student interests primarily shape these choices.
On university choice, the main message is that earnings should only be a small factor in students’ decision-making. University attended explains only a small proportion of all the variation in graduate income.
A degree from a Go8 university is not going to open many doors that would otherwise be closed. A wide range of personal, occupational, firm, industry and broader economic factors influence long-term earnings.