Individual returns to vocational education and training qualifications: Their implications for lifelong learning

An assessment of the financial benefits to individuals of investing in vocational education and training (VET) is undertaken in this study. The methodology involves the estimation of wage regression equations using data from a representative sample of Australian employees to identify the effect of possessing a VET qualification on individual wages.

These estimated wage effects are then used in calculations of the after-tax rate of return to different qualifications for individuals in different circumstances. That is, the analysis addresses how rates of return differ for those with different levels of prior experience and educational attainment and who combine their studies with different forms of labour market participation. These estimated rates of return show the annual percentage return on the investment involved in undertaking a qualification over the remainder of an individual's career. They can be compared directly with post-tax interest rates or returns from other investments. The data used for the analysis come from the 1997 Survey of Education and Training Experience (1997 SET) conducted by the Australian Bureau of Statistics (ABS).

The study builds on the existing literature on the returns to VET qualifications in three ways. First, it contains estimates of returns to associate diploma and basic vocational qualifications when most previous studies have concentrated on the returns to apprenticeships. Second, it identifies how the estimated returns to VET qualifications vary, depending on the combination of work and study individuals engage in while undertaking their courses. Third, it takes a small step beyond the use of individuals' 'highest qualification' level as the sole description of their education and training to estimate the effect on wages of follow-up qualifications. The key results of the analysis follow.

1. Individuals who complete VET qualifications generally receive higher wages than similar individuals who do not complete VET qualifications.

Relative to their respective comparison groups, the increase in the wages of employees with VET qualifications is about 10%. That is, associate diploma graduates are paid about 10% more than Year 12 completers and basic and skilled vocational qualification graduates about 10% more than individuals who did not complete the highest level of schooling.

2. The wage effects are higher for males who complete VET qualifications than females.

The estimated wage increments are slightly higher than 10% for males and a bit below 10% for females. Other researchers have also found that VET qualifications provide better wage outcomes for males than females.

3. Wages vary by VET qualification level.

The wages of employees with VET qualifications vary between qualification levels - individuals with associate diplomas are paid significantly more than those with skilled or basic vocational qualifications. The difference is also of the order of 10%.

4. VET qualification effects provide a continuing benefit to individuals throughout their careers.

The estimated wage effects do not appear to be influenced in a marked way by any depreciation in the value of VET qualifications over time, nor do they depend on when in individuals' careers they obtained their qualifications. However, the wage-experience profile of VET graduates is considerably flatter than other individuals in the labour market, which means that their wages grow more slowly than others. This may reflect different rates or types of post-entry training that different groups of employees undertake.

5. VET study that does not lead to a qualification may have little effect on wages.

Shorter VET courses of study of up to one semester that do not lead to a qualification were not found to have a discernible impact on wages. If the costs of such courses are low, they may provide a post-tax return through an increase in wages too small to identify in a wage regression equation of the type used here. Similarly, courses individuals commenced but do not complete did not appear to affect their wages.

6. Estimated returns to VET qualifications depend critically on the work/study combination used by individuals to undertake their courses.

The estimated wage effects translate into markedly different estimates of the post-tax rate of return to undertaking a VET qualification depending on the way the individual is assumed to have completed their course. That is, the combination of work and study that an individual engages in has a substantial impact on the return they obtain from their VET qualification.

7. Returns to VET qualifications are highest for those who work full-time and study part-time while undertaking their course.

Those individuals who work full-time during their course and study part-time appear to earn quite substantial returns on their qualification. For these individuals, not only is their forgone income relatively small, they also obtain valuable full-time labour market experience while undertaking their course. Individuals who take this path to obtaining their qualification typically earn post-tax returns for their qualification in excess of 20%, with the returns even higher for basic vocational qualifications.

By contrast, individuals who undertake their courses full-time may forego substantial income in doing so. With the estimated wage effects and modest levels of student income from either part-time work or government income support arrangements, the estimated returns to this way of undertaking courses are considerably smaller. For associate diploma courses, the estimated returns are under 5% for young males and negative for young females. These estimated rates of return for individuals who adopt the full-time study mode for courses are considerably lower than those estimated for Bachelor degree graduates, which have typically been estimated to be at least 10%.

The rate of return magnitudes of the two broad work/study participation types seem quite robust to alternative assumptions made in undertaking their calculation. The estimated returns are not influenced much by modest variations in the course fees individuals are assumed to pay.

8. Those who undertake follow-up VET qualifications receive higher wages for doing so. Lifelong learners who work full-time and study part-time enjoy modest, positive returns for further VET qualifications.

Somewhat more speculatively, the labour market appears to reward at least one form of lifelong learning. Individuals who undertake a VET qualification that is no higher than some previous qualification they possess seem to receive an increase in their wages for doing so. These increased wages translate into post-tax rates of return of about 10% for 35 year old full-time employed males and females who undertake such a follow-up qualification on a part-time basis.

Some remaining uncertainties

All empirical studies are limited by the inadequacies of the available data and the methodology used to analyse that data. Some issues highlighted in this study point to areas where further work could valuably be undertaken to clarify and consolidate some of the findings of this report. The first relates to the specification of experience in wage regression equations and the finding that the wage-experience profile of VET graduates is flatter than those of other individuals in the labour market. Further work is necessary to test the robustness of this finding and to identify more satisfactory specifications of labour market experience for wage equation estimation. It is possible that the use of repeated cross-sectional data that allow identification of cohort effects might also clarify the shape of the wage-experience profile of VET graduates and others in the labour market.

If the finding that VET graduates do have relatively flat wage-experience profiles is confirmed in other work, research on the reasons underlying such a phenomenon is obviously very important. An examination of the role of the post-labour market entry training experiences of VET graduates may be very informative.

Finally, individuals chart all types of paths through post-school education and training. The use of their 'highest' qualification level to summarise their education and its effect on their wages is obviously inadequate. The small step taken in this study to use a more accurate description of the education of individuals could be valuably extended. Studies that identify the biases involved in using only 'highest' qualification would be very informative, particularly the extent of the biases attached to VET-level qualifications.