‘THE ECONOMIC RECORD, VOL. 72, NO. 219, DECEMBER 1996, 370-280 Education and the Structure of Earnings in Australia* JEFF BORLAND. Centre for Economic Policy Research, and Research School of Social Sciences, ‘Australian National University, Canberra, ACT 0200 Department of Economies, University of Melbourne, Parkville, Victoria 3052 This study examines the evolution of earnings of workers with different levels of educational attainment in Australia from 1968} 69 to 1989/90. Descriptive information on average earnings of workers by level of educational attainment is presented, and an assessment of the role of shifts in labour supply and labour demand in explaining changes in earnings differentials between workers by level of educational attainment is wi I Introduction Since the late 1960s there have been dramatic changes in the educational attainment of the work- force and population in Australia (see for example, Maglen 1993, and Karmel 1995a). The immense shifts in the composition of educational attainment have attracted the interest of econo- mists for a number of reasons. First, information fon changes in the distribution of educational attainment, and on the effects of those changes on relative eamings of workers with different levels of educational attainment, is likely to be useful for understanding the causes of increases in eam- ings inequality which have occurred over the past two decades in Australia (see King er al. 1991, and Borland and Wilkins 1996). Second, it is of interest to assess how changes in educational attainment have affected the productivity of the workforce and employment outcomes in Australia (for example, Karmel 1993, and Gregory 1995). This study is motivated primarily by the issue * Tam grateful for helpful comments from Bruce Chapman, Flora Gill, Tony Phipps, and a referee, as well as participants in seminars at Monash University, University of Sydney, and 1994 Conference of Econo- mists. Roger Wilkins has provided excellent research assistance. This research has been supported by ARC Grant #479231437. 370 indertaken. of possible links between changes in earings in- equality and changes in relative eamings and workforce composition by level of educational attainment. A range of previous research has pre- sented descriptive information on changes in rel- ative eamings between workers with different levels of educational attainment (Miller 1983, Maglen 1991, 1993, Chia 1991, Karmel 1993, 1995a, 1995b, and Gregory 1995). The main finding from this research has been that earings differentials between education groups narrowed between the late 1960s and early 1980s, and then remained steady or widened slightly between the early 1980s and fate 1980s. Studies of changes in eamings inequality have shown that changes in earnings differentials between education groups had little effect on earnings inequality during the 1980s (Borland and Wilkins 1996). It might there- fore seem curious that a study of changes in earn- ings differentials between education groups should be of interest for analysis of the causes of changes in eamings inequality in Austral However, while changes in earnings differentials between education groups may not have had a direct effect on changes in eamings inequality during the 1980s, understanding the causes of the relative stability in earnings differentials between education groups may still be of interest. With the combination of large relative supply changes and © 1996, The Economic Society of Australia, ISSN 0013-0249.1996 EDUCATION AND EARNINGS 371 stability in relative earnings between education groups in the 1980s, it is of particular interest 10 assess how the demand for labour by level of edu- cational attainment might have changed over this period. Information on changes in relative demand for workers by level of educational attainment assists in assessing whether changes in. relative demand for workers by skill levels have occurred in Australia, and this is an issue of critical impor- tance for understanding developments in earnings inequality. Hence, the main objective of this study is to extend existing research by undertaking an analysis of the effects of changes in labour supply and labour demand on changes in relative eam- ings by level of educational attainment and on the distribution of educational attainment in the workforce. Section II provides an introduction to the data sources and classification of educational attain- ment which have been applied in the study. Section TI reviews descriptive information on changes in relative camings between workers by level of educational attainment in Australia in the period from 1968/69 to 1989/90. Section IV examines the effects of changes in labour supply and labour demand on earings differentials between. workers by level of educational attain- ‘ment. Concluding remarks are presented in Section V. H Data Sources Data on average annual earings by level of educational attainment for full-time full-year workers are available from the ABS Income Dis- tribution Survey (IDS) for males for six survey periods between 1968/69 to 1989/90, and for females for five survey periods from 1974/75 to 1989/90.! ‘The IDS is the only data source which provides information on average eamings of workers in disaggregated education and age groups over an extended time period for Australia. Earnings data in the IDS are derived from infor- mation on gross earnings from all. sources for persons with any earned income who were aged 15 and over at the time of the survey, Individuals who did not receive income for the full year, who ‘Changes in average weekly earings by level of educational attainment for full-time employees using individual-level data from the IDS for 1982-86 and 1986-90 were also examined, Similar findings to those reported in the paper for average annual earings were ‘obtained, For further details, see Borland (1995). were dependants at some time during the year, or who did not work full-time for the whole year, are excluded from the sample? Data on employment and numbers of persons in the labour force by level of educational attainment are derived from an annual ABS survey which has been conducted each February between 1979 and 1994 as a supplement to the monthly Labour Force Survey (LFS) (Labour Force Status and Educational Attainment Australia, catalogue 1n0,6235.0), and from the IDS. which provides information on the number of full-time full-year workers by level of educational attainment for each year of the survey. To achieve consistency between data sources information on educational attainment from each source has been grouped into a common set of classifications which distinguish between persons with a degree, persons with a trade qualification cor diploma, persons who have completed high school (CHS), and persons who have not com- pleted high school (NCHS). This method of clas- sification applies the categories for ‘educational attainment” in data on labour force participation and employment by level of educational attain- ‘ment which are reported in the LFS. To match the grouped data for full-year full-time workers from the IDS with this method of classification of edu- cational attainment it is necessary to assume that persons who left high school at 17 or 18 years had completed high school, and that persons who 2 The sample of full-time full-year workers omits part-time workers and full-time non full-year workers, ‘The effect on estimates of changes in relative eamings between education groups of omitting parttime workers is uncertain; however, itis important to note that parttime workers constiuted a significant and increasing proportion ofthe workforce aver the sample period. Gregory (1995, p.314) shows that the propor tion of full-time full-year male workers in the total ‘male population aged 15 and over was 73 per cent in 1968/69 and 7 per cent in 1989/90, and’ hence the ‘omission of par-time workers should be taken into account in interpreting the study's findings. The effect ‘on estimates of changes in relative earings between education groups of oiting full-time non full-year workers is likely to be insignificant. Analysis using ividual-level data from the IDS for 1981/82 and 1989/90 shows that changes in relative weekly earnings between education groups for a sample of all fulltime workers and a sample of full-time workers who worked 52 weeks in the previous financial year are virally ‘identical.