It’s all about what you learn. Isolating the human capital component in the returns to higher education

Abstract

Returns to higher education can reflect either an increase in human capital or job market signalling. In this paper, I isolate the human capital resulting from higher education, capitalizing on a distinctive feature of Norway’s implementation of the Bologna reform. Students who enrolled in 1999 inadvertently acquired more human capital com- pared to those who enrolled in 2000, despite earning identical degrees. This anomaly, two sets of graduates with identical degrees, of which one has more education, allows me to answer a key question concerning investment in higher education. How much does an increase in human capital increase an individuals’ earnings, in the absence of self-selection and signalling? I use rich longitudinal register data to estimate returns to university-acquired human capital. 15-20 years after first enrolling, receiving reform-induced human capital leads to gaining 1.5 percentile ranks in the earnings distribution. This corresponds to a 11 percent wage increase for an additional year of unobserved higher education. Human capital increases long-run earnings potential even when employers cannot observe it directly, but signalling matters when first entering the labor market.