Does Higher Education Guarantee Higher Pay? Not For All

The expansion of higher education has reduced the economic returns of a college education, according to a new study published in Research in Social Stratification and Mobility, focusing on the relationship between the college wage premium and China’s higher education expansion over the past two decades. According to researchers, among different social groups, the rural class has been most negatively impacted.

China has undertaken the largest expansion of higher education in world history since the 1990s, said Wu Xiaogang, NYU Shanghai & NYU Sociology Professor and Director of NYU Shanghai Center for Applied Social and Economic Research (CASER) and the corresponding author of the study. “The sharp increase was due to an educational policy launched in 1999 that aimed to increase the opportunity to gain a college education,” he explained. “Our study aims to provide scientific evidence to uncover the social process through which educational expansion reduces economic returns to college education and how they vary across different social groups.” 

According to the census data, annual college enrollment increased more than nine times in China, from 1 million in 1997 to more than 9.6 million in 2020, when 15.5% of Chinese adults had received a college education. “China’s higher education system has been transformed in a very short period of time,” said Wu, “from something available only for a small elite class to something available to the masses.”

The effects of that drastic transition have reverberated throughout Chinese society. The expansion of China’s higher education system has positive impacts on economic and social development; but there were some unintended consequences as well. China now has an oversupply of college-educated professionals, which has led to the devaluation of college credentials in the labor market, mismatch of education and job (over-education), and a decline in social mobility.   

Wu is not the first to study the college wage premium, but he and his collaborator, Associate Professor of Sociology at Yunnan University and former NYU Shanghai Postdoctoral Fellow of Sociology Guo Maocan, went deeper than previous research by holistically examining how the changing selection mechanism has impacted earnings returns of a college education over the course of the transformation of China’s higher education. The study utilized a double-treatment setting to comprehensively examine the impacts: a marginal treatment effect framework was adopted to estimate the causal effect of college education on salaries, while a difference-in-differences methodology to identify the policy effects of educational expansion on the college wage premium.

Using data from a series of nationally representative surveys from China, the study revealed a reversed pattern of selection effect, from positive to negative, on returns of a college education before and after the expansion, with initial high-likelihood college attendees benefiting the most before the expansion, but lower-likelihood college attendees benefiting more after the expansion. Furthermore, Wu and his collaborator observed social disparity. The college wage premium declined more among students from rural origin with a higher propensity for attending college after the expansion compared to their urban counterparts.

The study revealed something that has been widely discussed among the Chinese public in recent years - the devaluation or inflation of a Chinese college degree. College education  these days could no longer guarantee upward social mobility as it once did. The study uncovered how changes in inequality patterns were generated through a cumulative and asymmetric process.

“Our research has provided solid evidence to confirm the challenges that Chinese college graduates have been facing in the labor markets, such as low pay and job undermatch,” Wu said. “Given the unsatisfactory employment situations, more and more college graduates are pursuing graduate studies.” He added that competition for postgraduate degree entrance exams has become so intense that some even jokingly compare it to China’s highly competitive college entrance exams. So what kind of pay-off can graduates in China expect for a college education these days? 

“Our study has clearly shown that the real pay-off of college credentials is rather low among the post-expansion cohort,” said Wu. He added that workers’ intangible skills and abilities are valuable and can set candidates apart. “In other words, a new and high-level diploma or credential itself may not be worth that much. Instead, unobserved skills/abilities are valued and rewarded in the labor markets,” he said. “The question for the Chinese higher education system, perhaps also for the entire education system, is how to cultivate such abilities and identify those people with higher abilities in the school selection and job recruitment processes.”