Home / Opinion / Views /  The difference education makes to what the salaried earn in India

Unemployment among educated youth has been high in India for some years now. In 2018-19, only 65 out of 100 young adults (aged 20-29 years) with a college degree who were looking for work found jobs. In contrast, among young adults with less than a degree-level education, 90 out of 100 who were keen to work found it, according to our estimates based on the Periodic Labour Survey data.

Despite consistently rising unemployment, youngsters continue to invest in education because over their lifetime, they expect to earn more compared to people with low education. Educated workers may earn more not only because of education per se, but also because of other related traits such as superior abilities, ambition, diligence and better endowments like parental resources and status, all of which affect enrolment in higher education. Their earnings thus reflect a combination of these and other socio-economic factors.

Nonetheless, how much more people with higher levels of educational attainment earn at the start of their career, and how their lifetime- earnings’ trajectory changes vis-à-vis those with lower educational levels, are vital to understand returns on education. To investigate gaps in the earnings of two groups—the college-educated versus others—we ideally need data on earnings over their working lifespan. In the absence of such time-series data for India, however, we have adopted a simple but suitable alternative method.

Graduates ascend the earning curve faster
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Graduates ascend the earning curve faster

We ask, first, in a particular year among workers who are in regular-wage or salaried employment, how much does the average salary differ for workers with a degree-level education and others at the start of their career? Second, how large is the gap in earnings for the two groups of workers across different age groups? This should give us a fair idea of how earning potential changes as a regular-wage worker progresses through one’s career. By focusing only on salaried individuals, we minimize the influence of all other factors on incomes.

The analysis offers several interesting observations. First, in both rural and urban areas, younger adults (aged 20-24 years) with lower levels of education start at a similar level of salary, implying not much locational premium. Second, in rural areas, there seems to be little increase in wages with experience for low-educated salaried workers since the average salaries of the young and middle-aged (around 40 years) were largely the same. This is suggestive of a lack of alternative jobs in rural areas for experienced workers who have less than a college education. In contrast, in urban areas, there is a marginally better increase in the salaries of middle-aged workers with lower education compared to similarly educated younger workers.

Our disaggregated estimates among lower educated workers, comparing those in salaried employment with the self-employed, further suggest that while workers with less than primary education are better off in salaried employment, over their earning life in both rural and urban areas, workers with middle and secondary level of education earn more in self-employment in urban areas than in salaried employment.

Among educated workers, first, the average earnings of young regular salaried workers in urban areas are significantly higher than those of their rural counterparts, and the earnings see a sharp upward increase from the early twenties to mid-thirties. Second, average salaries appear to grow at a slower pace for educated workers in urban areas between the ages of 35 to 50 years, after which there is a sharp upward trend again.

The average salary of educated workers in the oldest age group (55-59 years) in urban areas is 2.3 times that of workers with lower education in the same age bracket. They also earn 1.6 times higher than their counterparts in rural areas. The cumulative compounding impact of such differences in earnings is likely to be substantial over a lifetime.

Some of the higher pay in urban areas would be reflective of a higher cost of living. However, given that in a particular year the compensation for differences in the cost of living should be similar across all age groups, educated workers in the higher age group in urban areas seem to earn a higher experience premium as they move up the organizational ladder and gain greater job mobility. Overall, our basic analysis provides a broad indication of the extent of income gains for highly educated workers who work in urban areas.

Our findings have public policy relevance. The high level of unemployment among Indian youth with degree-level education, in theory, indicates a surplus of educated workers. If true, this should lower salary pressure on employers recruiting entry-level educated workers. However, if the phenomenon of vast educated unemployment is more a reflection of low employability because of poor-quality education, then the effective surplus of educated workers may be much less. The India Skills Report 2019 suggests that only 47% of youth in India with a college education are employable (bit.ly/3lId7pk). Alternatively, educated youth tend to look for higher-paying and better-quality jobs, and if offered lower pay, are often ready to wait for a longer time to find a suitable job.

Apart from higher lifetime earnings and a greater pool of financial resources during old age, education also confers several non-monetary benefits on individuals, as shown by a large body of academic work. Education tends to improve decision-making on crucial life options. It is also found to improve patience and focus, and enable the formation of larger social networks, resulting in better access to opportunities.

Notwithstanding the other intrinsic benefits of education, a more systematic analysis is warranted to enhance our understanding of the variation in lifetime earnings by education, its quality, and by labour demand for highly-educated workers.

Sankalp Sharma of Data Development Lab contributed to this article.

Vidya Mahambare & Sowmya Dhanaraj are, respectively, professor of economics, Great Lakes Institute of Management, Chennai and assistant professor, Madras School of Economics

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