The Importance of Education in the Labor Market

by Karla Castillo

January 17, 2017

Additional education beyond high school leads to higher earnings, lower unemployment, and a wider range of career opportunities. There are also non-economic benefits intrinsic to higher education based on experiences and skills acquired during a student's academic career. A better-informed individual makes better financial, personal, and professional decisions.

Educational Attainment over Time, 2000-2016

Overall, the Oregon population is more educated than it was in 2000. From 2000 to 2016 the share of the population with education beyond high school increased in all categories. By 2016, almost 67 percent of the population had education beyond high school and 21 percent of the population had a bachelor’s degree. According to data from the Current Population Survey, the share of the population with master’s degrees experienced the greatest increase, followed by the share of the population with academic associate’s degree and with a bachelor’s degree.
The Relationship Between Education and Earnings

It’s widely recognized that more education leads to higher average earnings. The price differential between the less educated and the more educated is also known as the “return to education” and it has been the center of many studies. Economists have long studied and tried to measure the causal impact of education on earnings. However, the relationship between education and earnings is not easy to measure because wages are not always directly and exclusively tied to education. There are other individual characteristics that a person has that can also impact their overall wages. This complication in measurement has resulted in variations in the approach and estimation techniques used.

Despite the differences, all studies find that more education is overall associated with higher earnings. Also, several studies find estimates of the return to education that are similar in magnitude. David Card, an economist from the University of California, in his study “The Causal Effect of Education on Earnings reviews relevant literature on the relationship between education and earnings and found that most studies estimate that the return to one additional year of education is on average equivalent to an 8 to 13 percent increase in hourly earnings.

According to Card, most recent studies of the causal effect of education on earnings have their foundation in human capital theory. In his paper, he adjusts a conventional model of human capital earnings and found that in the U.S., approximately 20 percent to 35 percent of the variation in earnings data is explained by education and experience. By adjusting the same model to recent data in Oregon, I found that around 23 percent to 26 percent of the variation in earnings data is explained by education and experience. Another year of education is predicted to increase hourly wages by 10 percent. The return to an additional year of education is higher for women in the U.S. and in Oregon.

More Education Associated with Higher Earnings and Lower Unemployment Rates

Education has a consistent positive relationship with earnings. Full-time workers in Oregon with higher levels of education earn more than workers with less education. On average from 2011 to 2015, Oregon workers with less than a high school diploma earned an average of $20,273 per  year. Workers with higher levels of education saw higher earnings, peaking at an average of $59,799 for workers with a graduate or professional degree. At low levels of education, Oregon workers earned almost the same as the U.S. average, but as the level of education rose, Oregon average wages were lower than the national average.
The earnings of those with an advanced degree have recently grown the fastest in both the U.S. and in Oregon. From 2009 to 2015 earnings of workers in Oregon with less than a high school diploma grew 5 percent while the earnings of those with an advanced degree grew 10 percent.

Workers with more education have lower unemployment rates. According to data from the American Community Survey, while the unemployment rate for Oregon residents ages 25 to 64 with less than high school diploma averaged 13.4 percent from 2011 to 2015, those with a bachelor’s degree or higher had an unemployment rate of 4.7 percent.
Oregon Job Openings Polarized

Oregon has been growing at a fast pace since late 2014. The job gains in 2015 and 2016 were the best in the past couple of decades. The state added an average of 5,000 jobs per month, a 3.5 percent growth rate over the year. This job growth outpaces the average state by more than 1 percentage point. Oregon employment projections show faster job growth than the average state through 2024.

All private industries are expected to add jobs by 2024. Health care and social assistance industries are expected to add the most jobs, along with professional and business services. The construction industry will be the fastest growing sector with a growth rate of 22 percent.

However, among occupations, the largest number of openings will be in occupations that have low educational requirements and that are low wage. This reflects, to some extent, the effect of job polarization in Oregon. Opportunities for middle-wage jobs may be shrinking, with simultaneous growth concentrated at the high and low ends of the spectrum. The fastest growing occupations will be those that require an advanced degree (17.4%) and those that require less than a high school degree (16.4%).

Despite the disparity in job gains, educational attainment of the population will continue to play a key role in the labor market. One-third of job openings by 2024 typically require education beyond high school for entry into the occupation. More than half (54%) of the projected job openings will require some sort of education beyond high school in order for candidates to be more competitive in the hiring process. A bachelor's degree or higher will be needed for about 28 percent of the openings at the competitive level.

There are many social and economic benefits of education. Earnings are higher as education rises. In Oregon, 23 to 26 percent of the variation in hourly earnings is explained by education and one additional year of education increases hourly earnings by 10 percent. Also, the possibility of being unemployed is lower with a higher level of education. Finally, a higher level of education can help workers qualify for a wider range of job opportunities and help keep workers competitive as an increasing number of jobs require higher education.


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