The Wage Premium on Higher Education: Universities and Colleges

The study examined the wage premium on higher education obtained at different types of institution in Israel. It tracked all those born between 1978 and 1985, and relied on a variety of demographic and socioeconomic characteristics of the students and their families, achievements in matriculation and psychometric tests, academic education data, and wages over the years. The databases drew from administrative files and population censuses. In order to distinguish between return on institutions and return on abilities, we used three methods: OLS (selection on observables, including among siblings); TSLS using “geographic proximity to the educational institution” as an IV; and fuzzy regression discontinuity in the acceptance of candidates to departments in the higher education institutions. We first conducted estimations among individuals who completed a Bachelor’s or Master’s degree. The OLS estimation shows that, all else being equal, the gross annual wage among university graduates between 2008 and 2015 was about 10 percent higher than that of public college graduates, and wages among graduates of private colleges were about 6–7 percent higher. The wage gaps remained stable even after breaking down the data by the year in which the degree was completed and the number of years that have elapsed since then. The ranking of annual wage was maintained when broken down by gender, nationality, and parental income. The gross hourly wage among university graduates was similar in 2008 to the wage among graduates of private colleges, and about 4–6 percent higher than the wages of graduates of public colleges. We also conducted estimations among those with just a Bachelor’s degree. The OLS estimation showed that the annual wage of graduates of universities and private colleges was about 10 percent higher than the wage of public college graduates. The TSLS method shows that graduates of universities and private colleges earn about 20 percent more and 14 percent more than graduates of public colleges, respectively. In the fuzzy regression discontinuity method no differences were found between the wages of graduates of elite universities and other universities. When we compared those with Bachelor’s degree and those with just a matriculation certificate, we found that studying at public colleges generates a high return, although there are differences between institutions. The findings show that in every field of study, the type of institution is ranked differently in terms of graduates' wages. However, the annual and hourly wages of engineering graduates and those of para-medical professions are higher if they study at universities, while the opposite is true for business management.