By Georg Graetz, London School of Economics

How much does the class of degree affect earnings in the first job?  Using exam results and class of degree from five cohorts of London School of Economics (LSE) undergraduates in combination with a survey of their income in year after they graduated we find there are significant gains from just making the grade.

Specifically:

• The average wage pay-off to a First compared with a 2:1 is pretty small – around a 3% higher expected wage.
• There is a bigger difference between a 2:1 and 2:2 – a 2:1 is worth about 7% higher wages.
• These results are driven by males: men get about 6% in higher wages from a First whereas there are no significant gains for women.
• The cash premium for getting a First for a male is about £1,780 whilst women basically get nothing

Our study raises some interesting questions for policy. The results suggest that at least part of the earnings differences among graduates is due to luck rather than reflecting differences in ability. Employers usually have access to detailed exam marks and could in principle form an assessment of an applicant that is much more accurate than if they simply relied on degree class. However, our results imply that this is not usually done, perhaps because it would be too costly for HR departments to figure out the difficulty of each course and to determine how much weight to attach to a given mark. An intriguing alternative would be to replace the coarse degree class scheme by more detailed letter grades. This may make it easier for employers to assess an applicant’s ability, and it should diminish the role of luck in determining graduate’s earnings.

To find out whether students’ final grades make a difference to their subsequent labour market earnings, we look at the expected wages of students who were just above the threshold of getting a First (Upper Second), compared with those who were just below and therefore got an Upper Second (Lower Second). Since the critical threshold at LSE is getting Firsts in at least four papers (out of nine), we look at the mark of the fourth highest exam. Those who got 70% in their fourth paper should get a First; those who got 69% in their fourth paper should only get a 2:1. This technique, known as ‘regression discontinuity design’, works well because there shouldn’t be any difference in how smart or hard-working students are around this exact threshold, so this is a near-perfect control for ability. The only difference is the random luck of whether a student managed to get over the cliff for a First or was stuck with a 2:1. The same technique can be used to examine the difference between a 2:1 and a 2:2 (the critical mark is 60% in the fourth exam in this case).

This summarises A Question of Degree: The Effects of Degree Class on Labor Market Outcomes, by Georg Graetz and Andy Feng. The full paper can be found here: http://cep.lse.ac.uk/pubs/download/dp1221.pdf