Earnings expectations of first year university students and ex ante rates of return to investment in higher education: Evidence from English Business Schools and Czech Faculties of Economics

This research provides evidence from three Czech Faculties of Economics and one English Business School on students‟ expectations regarding their investment in higher education. It examines the expected earnings from which rates of return are calculated using the short-cut method, and ex ante risk is estimated using the coefficient of variation. Micro-level data have been collected specifically for the purpose of this study using a repeated cross-sectional survey. In addition to personal and socio-economic characteristics, first year students were asked to estimate their earnings with and without a university degree at two points in time – at the point of labour market entry and ten years later, and at three levels of probability – minimum, most likely and maximum. This study aims to investigate the factors that influence the expectations and to determine whether students act rationally as investors and according to the theory of human capital.

Earnings expectations have been found to increase with education and experience. Students expect their earnings to grow faster and further thanks to a university degree and expect their earnings at the point of graduation to be similar to the earnings they expected with ten years of post-secondary labour market experience. Students from high income families expect higher earnings than those from low income families. Women have been found to expect lower earnings than men and the gender-pay gap increases with education and experience. Students from England expect higher earnings than their Czech peers. The findings reveal that a very large majority of students act according to the theory of human capital by expecting at least zero rates of return, and that there is a positive relationship between returns and risk and thus that students act rationally as investors.

The average rate of return expected by English students is around 23% while those expected by Czech students range from 14% to 18%. Gender differences in rates of return were identified in England with women expecting higher rates of return. Nevertheless, it is concluded that gender differences in rates of return should be reported on in the context of risk-free rates of return otherwise the results may be misleading. Average ex ante risk associated with university education is the coefficient of variation of 0.35, which is similar to a randomly selected financial portfolio of 30 stocks. The expected risk-return trade-off is large; for a 1.1pp increase in risk men expect to be compensated by a 1pp increase in the rate of return while women expect for every 2pp increase in risk a 1pp increase in the rate of return.