Return on post-secondary education is narrowing with too few choosing to study high demand areas: CIBC

While on average graduates earn more, nearly half of new grads are in fields that underperform

TORONTO, Aug. 26, 2013 /CNW/ - Completing post-secondary education is still the best route to a well paying, quality job in Canada but the premium is dropping as too few students are graduating from programs that are in high demand, finds a new report from CIBC World Markets.

"A higher education may be a necessary condition for a good job in Canada, but it is no longer a sufficient condition," says CIBC Deputy Chief Economist Benjamin Tal who coauthored the report with CIBC Economist, Emanuella Enenajor. "Narrowing employment and earning premiums for higher education mean that, on average, Canada is experiencing an excess supply of post-secondary graduates.

"And despite the overwhelming evidence that one's field of study is the most important factor determining labour market outcomes, today's students have not gravitated to more financially advantageous fields in a way that reflects the changing reality of the labour market."

The CIBC report notes that the proportion of adults in Canada with a post-secondary education is the highest among all OECD countries and the cost of that education is roughly double the OECD average. Yet, more and more of those degree holders fall behind in the earnings scale with the share of Canadian university graduates who make less than half the national median income the largest among all OECD countries.

The CIBC economists found that this is largely the result of the programs Canadians have chosen to study. They examined various reports that have attempted to compute an annualized average "return on investment" (ROI) on education and found stark divergences depending on the field of study.

"Across subjects, the biggest bang for buck comes from specialized and professional fields such as medicine, law and engineering," says Mr. Tal. "A look at the dispersion of earnings across fields of study shows that there is a much greater risk of falling into a lower-income category for graduates of humanities and social sciences, with a limited risk for students of health, engineering or business.

"Those underperforming sectors comprise just under half of all recent graduates. In other words, Canadian students are continuing to pursue fields where upon graduation, they aren't getting a relative edge in terms of income prospects."

He notes that the relative divergence in outcomes across fields of study is really no secret. "Most Canadians are aware that on average, your odds to earn more are better with a degree in engineering than a degree in medieval history. The field-of-study premium isn't just a Canadian phenomenon—it's been observed in the U.S., Sweden and other industrial nations. But it's not clear that students, armed with that knowledge, have been making the most profitable decisions. With the exception of commerce, in the last 10 years we haven't seen a meaningful influx of students into degrees with more advantageous earnings outcomes."

As a result, the unemployment rate among university graduates is now just 1.7 percentage points lower than among those with only high school education - a gap that was much larger in the 1990s. The university premium over college has also narrowed and is now a slim 0.7 percentage points. While an MA or a PhD signals more specialized skills than a Bachelor's degree you will hardly see that result in the unemployment statistics, with the jobless rate premium falling to a trivial 0.5 percentage points.

While higher education overall still translates into better wages - a Bachelor's degree buys you more than a 30 per cent earnings premium over high school graduates with Masters or PhD graduates tacking on an additional 15 per cent - that premium is also narrowing. Real weekly wages of high school and college graduates rose by 13 per cent vs. 8 per cent among undergraduate degree holders and more than double the rate seen among MA and PhD holders.

A simple measure of employment quality, part-time employment, shows the same trend. The share of part-timers among university-educated Canadians rose from 10 per cent in the 1990s to 13.5 per cent today—with the gap relative to high-school graduates narrowing to only one percentage point.

"For students shelling out thousands in higher-learning costs, a university degree can be viewed as an investment with upfront expenses, and a stream of future benefits," says Mr. Tal. "And with roughly half of all Bachelor's degree students graduating with debt, a significant share of the population is starting their career one step behind in terms of financial health."

He thinks it is crucial to Canada's economy that we start producing more graduates in growth areas of the economy. "Improving participation rates in these fields will likely require some combination of developing an information infrastructure system designed to identify emerging trends in labour market needs, improved quality and equity of learning opportunities, increased resources, improved system efficiency and increased private investment, in part, in the form of corporate investment."

He adds that any remedy must also include a much simpler and efficient credential recognition process for new immigrants, better access to language training and better and more specific information to prospective immigrants on labour market demand and skills requirements. Today, more than 50 per cent of degree holders that obtained their education from outside of Canada earn less than the median income.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/if_2013-0826.pdf

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SOURCE: CIBC