The effect of VET completion on the wages of young people

As part of the drive to lift Australia's productivity, there has been a push for an increase in the number of course completions in both the vocational education and training (VET) and higher education sectors. While it is generally assumed that completing a course is the desired outcome, it is also expected that individuals will acquire skills even if they do not complete the course.

Using the 1995 and 1998 cohorts of the Longitudinal Surveys of Australian Youth (LSAY), this study looked at both the effects of participation in and completion of post-secondary educational qualifications on wages.

Key messages

• Participation in tertiary education brings wage advantages for young people, even if the course is not completed. This presumably reflects the skills acquired, although it could also reflect the personal characteristics that have led to participation in the first place.
• As expected, completion of a qualification in general brings a further wage advantage.
• On average, the largest wage benefits come from participating and then completing a bachelor's degree.

One of the difficulties of this type of study is that the relatively small sample sizes impact on the statistical significance of some of the results. They also limit the degree to which the variation in outcomes can be captured. This particularly affects the analysis of vocational qualifications because of the very large variation in wage outcomes; for example, courses such as electrotechnology lead to relatively high wages, which are not shared by courses such as those in the food trades. We need to keep in mind that some individuals will fare much better than the average, while others do less well.

Tom Karmel
Managing Director, NCVER

This project examines the effects of vocational education and training (VET) and higher education qualifications on the wages of young people in the three years following their last education spell. The main contribution of this research is that it clearly distinguishes the participation and completion effects (albeit with a particular focus on the latter), while most previous studies have looked exclusively at course completion. The use of the 1995 and 1998 cohorts of the Longitudinal Surveys of Australian Youth (LSAY) data allows us to distinguish completed and uncompleted courses. Focusing on whether or not there are wage benefits associated with the completion of a vocational qualification versus partial completion is important, given the push for greater course completions.

Descriptive statistics reveal that, for some VET and university courses, completers experience higher wages than non-completers in the few years following the course. However, the differences in wages between completers and non-completers are not consistently significant or tend to disappear over time for VET students, whereas they remain positive and significant for university students.

The relative wage premiums associated with course completion are referred to as completion premiums. Completion premiums are calculated as the difference in hourly wages between completers and non-completers one, two and three years after their last education spell. Completion premiums for early school leavers are variable and imprecisely estimated due to small sample sizes. For Year 12 graduates, a completion premium of about 12% is statistically significant for apprenticeships and traineeships at certificate level I or II in the year following the course. The completion premium for one year after the course is close to 19% for university graduates, and remains statistically significant two and three years after obtaining the degree, with no sign of a reduction in the size of the premium over this period.

Multivariate analyses, consisting of estimating (Mincer type) wage equations one, two and three years after the last education spell, reveal a consistent picture. After controlling for a range of individual characteristics and for potential selection biases, only the completion premiums attached to university qualifications are consistently significant in the three years following the course, for both males and females. Moreover, the university completion premiums tend to increase over time, from about 10% for females and 7% for males after one year, to about 16% for females and 12% for males three years after.

By contrast, completion of a VET course generally has positive effects but these effects are imprecisely estimated. There are, however, a few exceptions:

• Wage penalties (that is, negative completion premiums) are found one year after completion of certificates level III or IV for female apprentices and trainees and for males not in an apprenticeship or traineeship. One reason why wage penalties could arise for those who complete such courses compared with those who don't relates to the fact that some may have left a course as a consequence of obtaining a relatively high-paying job (compared with jobs typically found by those who complete their course).
• Splitting the sample between those in the top and bottom 50% of test scores shows a completion premium, ranging from 7% to 9% for those in the top 50% who completed a certificate level I or II, a non-apprenticeship certificate level III or IV or a diploma. However, none of these VET completion premiums remains statistically significant in the third year following the course.

Controlling for attrition only results in marginal changes to the findings from the multivariate analysis. In addition to the completion premiums for bachelor's degrees, a few additional VET completion premiums now appear to be significant at the 5 or 10% level. For males, those who complete diplomas are shown to have wages of about 7% and 9% higher than non-completers two and three years after the course. The enrolling premiums as well as the field of study effects remain even after attrition has been controlled for. Other effects regarding prior education level and schooling remain largely unchanged. These results suggest that the impact of participant attrition in LSAY is minimal, as data appear only weakly correlated to the unobserved determinants of wages.

Overall, the results reveal that completion of a VET course may have a positive effect on subsequent wages but these effects tend to be imprecisely estimated. By contrast, we find strong and convincing evidence that enrolling in a VET course increases subsequent wages. In other words, completion may not matter in terms of wages, with VET participants still enjoying higher wages than non-participants. However, we cannot exclude the possibility that our sample is simply too small to estimate completion effects precisely.