The Wage Premium on Higher Education: Universities and Colleges
- A study published today by the Bank of Israel examines the increase in wages as a result of obtaining higher education at different types of institutions in Israel (universities, private colleges and public colleges).
- Adjusting for the effect of personal characteristics, the study found that the gross annual wage among Bachelor’s and Master’s degree graduates at the universities was about 10 percent higher between 2008 and 2015 than among graduates of the public colleges, and that graduates of the private colleges had wages that were 6–7 percent higher than graduates of the public colleges.
- The gaps in annual wages remained stable when examined according to the year in which the degree was completed and the number of years that have elapsed since then.
- The ranking of annual wages between types of institution was maintained even after dividing the adult population by gender, nationality, and parental income.
- The gap in gross hourly wage between university and private colleges and those of the public colleges was 4–6 percent. It is lower than the gap in yearly wage because university and private college graduates work more hours on average.
- A comparison of Bachelor’s degree graduates from the public colleges and those with just a matriculation certificate shows that studying at the public colleges generates a solid wage premium.
The rate of Israelis with a higher education has almost tripled since the beginning of the 1990s, and Israel is currently placed very high in the OECD in terms of the percentage of higher education graduates in the population. Among other things, this is due to the rapid expansion of the public (funded) and private (unfunded) college system since the beginning of the 1990s. The colleges (other than the colleges of education) currently contain half of Bachelor’s students.
A Bank of Israel study—conducted by Leah Achdut, Elad Gutman, Noam Zussman, Idan Lipiner and Inbal Ma’ayan—examined the wage premium on higher education obtained at the various types of institutions in Israel. For that purpose, the study examined data on all those born between 1978 and 1985, and relied on a variety of demographic and socioeconomic characteristics of those people and their families, their matriculation and psychometric scores, their academic education, and their gross wages between 2008 and 2015.
In order to identify the wage premium by type of institution, the premium on education obtained in that type of institution must be isolated from the premium on personal capabilities, since talented students generally study at higher quality institutions. The study used a number of statistical methods to make this distinction.
The estimations made among those with Bachelor’s or Master’s degrees show that, all other things being equal, the gross annual wage of university graduates was about 10 percent higher between 2008 and 2015 than the wage of public college graduates, and the wage of private college graduates was 6–7 percent higher than the wage of public college graduates. The wage gaps remained steady even after the data were broken down by the year the degree was completed (Figure 1) and the number of years that have elapsed since then (Figure 2). The ranking of annual wage was maintained when graduates were divided by gender, nationality and parental income. The gross hourly wage of university graduates was similar in 2008 to the parallel wage among private college graduates, and about 4–6 percent higher than that of public college graduates. This gap is smaller than the gap in annual wage because the graduates of universities and private colleges work more hours per year on average than the graduates of public colleges.
Multi-variable estimations made among those with Bachelor’s degrees only showed that the annual wages of university and private college graduates is about 10 percent higher than the wages of public college graduates, similar to the findings when the pool is expanded to include both Bachelor’s and Master’s graduates. Alternative estimation methods showed that the graduates of universities earn about 20 percent more, and the graduates of private colleges earn about 14 percent more, than the graduates of public colleges.
The main part of the study deals with the gaps in the wage premium on higher education between graduates of the different types of institution. While it finds that the premium on studies at the public colleges is lower than at the universities and private colleges, it is important to note that the comparison between the wages of Bachelor’s graduates and those with only matriculation certificates indicates that studies at the public colleges also generate a solid return. The wages of social science and business administration graduates from the public colleges are about 30 percent higher than the wages of those with just a matriculation certificate, and the gap reaches 80 percent for computer science graduates.
The findings show that the types of institute of higher education are ranked differently in terms of wage for each field of study (Figure 3). The yearly and hourly wages of graduates in engineering and the paramedical studies are higher if they learn at universities, while in business administration, the wages of college graduates are higher.
 The premium on higher education is the additional wage (in percent) derived from obtaining a higher education.