Earnings Premium Research Articles

Timing Law School

We investigate whether economic conditions at labor market entry predict long-term differences in law graduate earnings. We find that unemployment levels at graduation continue to predict law earnings premiums within 4 years after graduation for earners at the high end and middle of the distribution. However, the relation fades as law graduates gain experience and the difference in lifetime earnings is moderate. This suggests that earnings figures from After the JD II and III -- which track law graduates who passed the bar exam in 2000 -- are likely generalizable to other law cohorts because these studies are outside the window when graduation conditions predict differences in subsequent earnings.Outcomes data available prior to matriculation do not predict unemployment or starting salaries at graduation. Earnings premiums are not predicted by BLS projected job openings. While changes in cohort size predict changes in the percent of law graduates practicing law, we find little evidence that changes in cohort size predict changes in earnings. This suggests that law graduates who switch to other occupations when law cohort sizes increase are not hurt financially by larger cohorts. For medium to high earning graduates, successfully timing law school predicts a higher value of a law degree ex-post, but simulations show that no strategy for ex-ante timing is readily available.This article has been accepted for publication in the Journal of Empirical Legal Studies.A powerpoint presentation of an earlier version of this article is available at: http://ssrn.com/abstract=2612634.

The Public Earnings Premium in a Mineral Rich Economy: New Piece in the Puzzle

This paper addresses the determination of sector earnings and the public earnings premium in Saudi Arabia. It uses a primary cross section of individuals collected in 2013, and employs the Oaxaca-Blinder decomposition methodology to show whether the observed sectoral earnings' differential is explained by differences in workers' characteristics or by a favorable public wage structure. While controlling for selection, the paper shows that public workers are better endowed rather than overpaid by a wealthy state. This finding suggests that, contrary to the general belief, the determination of public earnings does not contradict active labor market policies designed to encourage private sector employment of locals.

The Earnings Returns to Graduating with Honors: Evidence from Law Graduates

This paper studies the causal effects of graduating from university with an honors degree on subsequent earnings. While a rich body of literature has focused on estimating returns to human capital, few studies have analyzed returns at the very top of the education distribution. We highlight the importance of honors degrees for future labor market success in the context of German law graduates. Using a difference-in-differences research design combined with entropy balancing, we find that students of law who passed the state bar exam with an honors degree receive a significant earnings premium of about 14 percent. The results are robust to various sensitivity analyses.

The Earnings Returns to Graduating with Honors: Evidence from Law Graduates

This paper studies the causal effects of graduating from university with an honors degree on subsequent earnings. While a rich body of literature has focused on estimating returns to human capital, few studies have analyzed returns at the very top of the education distribution. We highlight the importance of honors degrees for future labor market success in the context of German law graduates. Using a difference-in-differences research design combined with entropy balancing, we find that students of law who passed the state bar exam with an honors degree receive a significant earnings premium of about 14 percent. The results are robust to various sensitivity analyses.

Sexual Identity, Earnings, and Labour Market Dynamics: New Evidence from Longitudinal Data in Australia

Using newly collected data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, this study presents new estimates of the earnings effects of sexual orientation in Australia and offers the first empirical investigation of the labour market trajectories of lesbian/gay/bisexual individuals. Our results show that gay males are: (i) less likely to be continuously employed than their heterosexual counterparts, and (ii) face an earnings penalty of approximately 20 percent, driven, in part, by a longer-run earnings growth penalty relative to heterosexuals. Individual fixed effects estimates show that males entering into same-sex partnerships experience earnings declines relative to those entering into opposite-sex partnerships. For lesbians, we find evidence of an earnings premium, explained largely by increased labour supply on the intensive margin and, to a lesser extent, greater earnings growth over time.

Wage differentials of males and females in same-sex and different-sex couples in Canada, 2006–2010

This paper utilizes five cycles of the General Social Survey in consecutive years from 2006 through 2010 to address the issue of differential wages amongst members of same-sex couples compared to their counterparts in different-sex couples. We find that men in gay couples have wages that are statistically indistinguishable from those of males in heterosexual relationships. By contrast, a sizeable and statistically significant earnings premium exists for lesbians in same-sex couples.

The Economic Value of a Law Degree

AbstractWe investigate the economic value of a law degree and find that for most law school graduates, the present value of a law degree typically exceeds its cost by hundreds of thousands of dollars. The median and 25th-percentile earnings premiums justify enrollment. We track lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We incorporate unemployment and disability risk and measure earnings premiums separately for men and for women. After controlling for observable ability sorting, we find that a law degree is associated with median increases of 73 percent in earnings and 60 percent in hourly wages. The mean annual earnings premium is approximately $57,200 in 2013 dollars. Values in recent years are within historical norms. The mean pretax lifetime value of a law degree is approximately $1 million.

Sharpe-ly Leveraged: A Model of Human Capital Formation Under Debt Service Constraint

Human capital, like any other form of wealth, lends itself to analysis through the tools of mathematical finance. No less than in other forms of enterprise, human capital formation involves risk. Returns on human capital and the risks inherent in its formation are affected by leverage. This is especially true in the United States, where a significant number of students finance higher education by borrowing. This article specifies a basic model of human capital formation that attempts to capture the essence of the risk-adjusted returns that students hope to realize when they pursue further education. This article adapts the Sharpe ratio of modern portfolio theory to measure the risk-adjusted benefit of education-enhanced earnings as the ratio of expected earnings to the volatility of those returns on human capital. It then adjusts both earnings and their dispersion to account for educational debt. On the debt service and earnings premium assumptions adopted by this article, debt-financed higher education will not enhance earnings on a risk-adjusted basis unless (1) the square root of the earnings premium (2) times the square of 1 minus the debt service ratio times the ratio of educational debt to annual earnings (3) exceeds 1.

The Return to College: Selection and Dropout Risk

This paper estimates the effect of graduating from college on lifetime earnings. Motivated by the fact that nearly half of all college students fail to earn a bachelor’s degree, we study a model of risky college completion. The central idea is that students drop out of college mainly because they fail to complete the requirements for earning a degree. This introduces two levels of ability selection that reinforce each other. (i) In college, low ability students typically do not succeed academically and drop out. (ii) At the college entry stage, their poor graduation prospects deter low ability students from even attempting college. Taken together, the two levels of selection generate a large ability gap between college graduates and high school graduates. We calibrate the model to data for men born around 1960 and find that ability selection accounts for nearly half of the college lifetime earnings premium.

Economic returns to occupational closure in the German skilled trades

Recent sociological studies argue that wage differentials between occupations are partly attributable to occupational closure. Occupations set up barriers which restrict the supply of occupational labor, thereby generating an economic rent. In this article we study occupational closure in the skilled trades of Germany, where the Trade and Crafts code restricts self-employment in 41 occupations to those who are master craftsmen. Newly gathered occupational data about the Trade and Crafts code is mapped on micro data from the German Microcensus of 2006. The central finding of our empirical analyses is that self-employed workers with comparable levels of human capital and demographic characteristics earn structurally more in closed occupations. We argue that this earnings premium is a rent, obtained by self-employed because of the entry restriction that is laid down by the Trade and Crafts code.

Trends in the Returns to Social Assimilation: Earnings Premiums Among U.S. Immigrants that Marry Natives

Previous studies show that immigrants married to natives earn higher wages than immigrants married to other immigrants. Using data from the 1980-2000 U.S. censuses and the 20052010 American Community Surveys, we show that these wage premiums have increased over time. Our evidence suggests that the trends cannot be explained by changes in the attributes of immigrants that tend to marry natives but are instead most likely a result of increasing returns to the characteristics of immigrants married to natives. Because immigrants married to natives tend to have more schooling, part of the increasing premium can be explained by increases in the returns to a college education. However, we find increasing intermarriage premiums even when allowing the returns to schooling as well as English-speaking ability to vary over time. We believe these patterns are driven by changes in technology and globalization which have made communication and management skills more valuable in the U.S. labor market.

The Lifetime Earnings Premium in the Public Sector: The View from Europe

The Lifetime Earnings Premium in the Public Sector: The View from Europe

The Economic Value of Bilingualism among 1.5- and Second-Generation Korean Americans

This study examines whether there is an earnings premium for fluent bilingualism among 1.5-generation and U.S.-born Korean Americans in the labor market. The data come from the 2009-2011 American Community Surveys, and the sample is restricted to wage and salary workers. Logged annual wage and salary income was regressed on two dummy variables for bilingual competence?bilingual with fluent English proficiency and bilingual with limited English proficiency (English monolingual as reference category), controlling for indicators of human capital and the language-use environment. Findings show greater economic returns to fluent bilingualism among 1.5-generation Korean women and U.S.-born Korean men, but there is no convincing evidence of a wage premium for fluent bilingualism among U.S.-born Korean women. Surprisingly, there is evidence of wage penalties for fluent bilingualism among 1.5-generation Korean men in certain geographic areas and occupations. These mixed findings are consistent with the recent discussion of bilingualism as both human capital and ethnicity.

The Million Dollar Law Degree, Powerpoint Presentation

Legal academics and journalists have marshaled statistics purporting to show that enrolling in law school is irrational. We investigate the economic value of a law degree and find the opposite: given current tuition levels, the median and even 25th percentile annual earnings premiums justify enrollment. For most law school graduates, the present value of a law degree typically exceeds its cost by hundreds of thousands of dollars. We improve upon previous studies by tracking lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We also include unemployment and disability risk rather than assume continuous full time employment. After controlling for observable ability sorting, we find that a law degree is associated with a 73 percent median increase in monthly earnings and 60 percent increase in median hourly wages. The mean annual earnings premium of a law degree is approximately $57,200 in 2013 dollars. The law degree earnings premium is cyclical and recent years are within historical norms. We estimate the mean pre-tax lifetime value of a law degree as approximately $1,000,000.

Exploring Market Reactions to a High-Quality Auditor and Managerial Preference for Audit Quality

We explore the entry of a high-quality (HQ) auditor, who provides independent and high-quality audits, into existing audit markets. U.S. and EU regulatory bodies have signaled dissatisfaction with audit quality through audit inspection reports as well as proposed and enacted reforms. Our experimental markets explore whether increased quality competition leads to increased audit quality, effort, and managerial demand for audit quality. We find that the addition of an HQ auditor does not increase other auditors’ effort and quality. Instead other auditors reduce their audit effort thereby providing lower quality. It appears that this behavior is a result of differing managerial demand for audit quality, as we find strong evidence that the HQ auditor does not dominate the market, despite investors placing a premium on High/Agree reports issued by the HQ auditor. That is, while holding costs constant, managers forego an earnings premium associated with the HQ auditor, suggesting that other forces beyond economic considerations impact the demand for audit quality. Additional analysis suggests loss aversion as a potential explanation; managers appear to forego higher payoffs to receive fewer disagree reports thereby smoothing their earnings. This evidence, along with the price premium for HQ auditor reports, suggests a gap between investors and managers with respect to the value of monitoring. Our findings indicate a need for additional theoretical and empirical investigation to develop a more comprehensive theory of the demand for auditing.

Licensing One of the World’s Oldest Professions: Massage

In this paper, we analyze the development of occupational regulation of massage therapists in the United States as well as the effects of state licensing and certification on their earnings and numbers. Our results suggest that massage therapists working in states with licensing receive an earnings premium of as much as 16.2 percent. We also find some evidence that licensing seems to reduce the number of massage therapists. We find less convincing evidence that certification has had similar effects. We argue that, taken together, our results suggest that licensing restricts entry at the expense of consumers and that its effects are less likely to be explained by other competing factors.

Wage Differentials of Males and Females in Same-Sex and Different-Sex Couples in Canada, 2006-2010

This paper utilizes 5 cycles of the General Social Survey in consecutive years from 2006 through 2010 to address the issue of differential wages amongst members of same-sex couples compared to their counterparts in different-sex couples. We find that men in gay couples have a measurable – but statistically insignificant – wage penalty compared to males in heterosexual relationships. A sizeable and statistically significant earnings premium exists for lesbians in same-sex couples.

The Million Dollar Law Degree

Legal academics and journalists have marshaled statistics purporting to show that enrolling in law school is irrational. We investigate the economic value of a law degree and find the opposite: given current tuition levels, the median and even 25th percentile annual earnings premiums justify enrollment. For most law school graduates, the net present value of a law degree typically exceeds its cost by hundreds of thousands of dollars.We improve upon previous studies by tracking lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We also include unemployment and disability risk rather than assume continuous full time employment.After controlling for observable ability sorting, we find that a law degree is associated with a 60 percent median increase in monthly earnings and 50 percent increase in median hourly wages. The mean annual earnings premium of a law degree is approximately $53,300 in 2012 dollars. The law degree earnings premium is cyclical and recent years are within historical norms.We estimate the mean pre-tax lifetime value of a law degree as approximately $1,000,000.A powerpoint presentation version of this article is available at: http://ssrn.com/abstract=2270175.A final version of this article has been published in The Journal of Legal Studies as Michael Simkovic & Frank McIntyre, The Economic Value of a Law Degree, 43 J. LEGAL STUD. 249 (2014).The final published version of the article can be accessed through Jstor or the JLS website.

Are there returns from university location in a state-funded university system?

A location in an economically active, high-amenity region could in many ways be a significant advantage for a university and its students and thus could also be positively linked to students' subsequent earnings. Based on this hypothesis, the present study empirically examines the effect of university location choice on earnings in Finland, focusing on the following question: To what extent does the choice of university location explain the observed positive early-career earnings premium for students graduating from the Helsinki metropolitan area rather than from one of the nine other university cities? The results suggest that no positive average earnings premium exists for metro area graduates after differences in students' pre-university characteristics are taken into account. However, the metro area university premium is found to be, to some extent, heterogeneous across fields and regional labour markets. The findings also indicate the importance of accounting for the selective nature of individuals' migration behaviour when conditioning on post-university region in the estimation of university location effects.

The return-to-entrepreneurship puzzle

The returns to entrepreneurship are monetary and non-monetary. We offer new evidence on these returns using a large sample of male twins. Our within-twin analysis suggests that OLS estimates are downwards, and panel data estimates upwards biased. The within-twin estimates imply that entrepreneurs earn a negative earnings premium. Our within-twin analysis of non-monetary returns shows that entrepreneurs work longer hours and have greater responsibilities, but also have a greater control over their work.