Is There a Devaluation of Degrees? Unobserved Heterogeneity in Returns to Education and Early Experience

We show that the expected real wages commanded by some higher-education degrees decreased in absolute terms in France, in the past two decades, and that this drop is not due to adverse selection. To study the returns to degrees and experience, we assume the existence of a finite number of latent types and estimate a finite-mixture model. Each type has its own log-wage equation, experience-accumulation and education-choice equation. This allows us to decompose the treatment effects of education as an average of type-dependent effects. We then show that some unobserved types experienced a real-wage drop while others benefited from an increase, with the same degree. The observed ``flattening'' of returns to experience is also heterogeneous. In the case of Master degrees, the estimated distribution of latent types indicates that student selection improved with time, in spite of the fact that the number of graduates increased substantially. An excess supply of graduates might therefore be a likely explanation for the devaluation of Master's degrees.