People in the United States with postgraduate degrees experience smaller shocks to their pay over the business cycle than those who only have bachelor degrees. That is the central finding of research by Ran Gu, to be presented at the Royal Economic Society”s annual conference at the University of Sussex in Brighton in March 2018.

Analysing data from the US Current Population Survey 1976-2016, the study shows that for every one percentage point increase in the unemployment rate, the average real wage for postgraduates declines by 0.3% while that for bachelor graduates declines by 1.2%. Thus, education can provide insurance against cyclical wage shocks, but only at the postgraduate level.

The author explains this result in terms of postgraduates having higher adaptation costs than bachelor graduates. For example, postgraduates have more specific skills on the current jobs that are non-portable to other jobs, and they need longer time to adapt to new jobs. So postgraduates are more willing to keep their current jobs.

Because of this, in booms, firms do not need to keep postgraduates by raising wages. Then when the economy gets worse, firms do not need to cut their wages. As a result, firms offer postgraduates more stable wages over the business cycle.

Next, the study provides empirical evidence that postgraduates have higher adaptation costs. It documents that postgraduates need 58 weeks on average to adapt to their jobs, and they suffer 17% losses in wages if they are removed from their current jobs. These two parts of adaptation costs for postgraduates are twice as large as those for bachelor graduates.

The study then uses a model to show these differences in adaptation costs are an important driving force for the differences in wage shocks over the business cycle between postgraduates and bachelor graduates.

The policy implication is that postgraduates get this additional wage insurance from firms, but lower educated workers don”t. So lower educated workers need more social insurance.

Previous studies find that college graduates and non-college workers are subject to similar wage shocks over the business cycle. As the share of workers with postgraduate degrees has doubled since 1980, the new study compares postgraduates with bachelor graduates.

Adaptation Costs and the Business Cycle Effects on the Postgraduate Wage Premium

Ran Gu

University College London and Institute for Fiscal Studies | +447445586700 | ran.gu.10@ucl.ac.uk