What Is A Graduate Earnings Premium?

Also known as college earnings premium (CEP), the issue of graduate earnings premium (GEP) has been a central focus for researchers, policy analysts, and scholars. Such concern is understandable considering the rising costs of a college education and the impact of higher education on lifetime earnings, overall health, and retirement, among other outcomes.

college wage premium definition

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What’s the Generally Accepted Definition of Graduate Earnings Premium (GEP)?

This is defined as the increase in an individual’s median annual salary or hourly wage if he/she has a bachelor’s degree from an accredited college or university. The premium is typically a comparison of the salary/wage between a college graduate and a high school graduate. But comparisons may also be made between a college graduate and a person with some college education or with an associate degree in the same or similar area of study. 

How Much Is the Graduate Earnings Premium (GEP) in the US?

College-educated employees typically enjoy a substantial GEP in the United States. But the actual amount widely differs, too, depending on several factors including college, occupation, and geographical location. 

Generally speaking, the GEP and its related data can be summarized as follows: 

Education LevelMedian Weekly EarningsMedian Annual EarningsAverage Unemployment Rate

High School Diploma
Some College but No Degree$833$43,3163.3%
Bachelor’s Degree$1,248$64,8962.2%

While earning a high school diploma means earning less, it’s better than not earning it or its equivalent. Non-high school graduates earn $8,000 per year less than their counterparts with a high school diploma. 

The earnings potential increases with every level of higher education earned, too, while the risk of unemployment decreases. You can earn, for example, $21,580 more annually if you have a bachelor’s degree than if you only have a few semesters under your belt. 

Over a 40-year career, you may earn about $750,000-plus in additional income with a bachelor’s degree alone. Indeed, earning a bachelor’s degree makes excellent financial sense based on GEP alone. 

GEP - FAQ - fact 1

Why do employers place a high value on college degrees? In an article published on the Association of American Colleges and Universities (AAC&U) website, researchers on its employer research, “Fulfilling the American Dream: Liberal Education and the Future of Work, concluded that most hiring managers and business executives believe in the importance of a college education. Indeed, they believe that college degrees are well worth the time, money and effort, as well as expressed confidence in the American education system! 

The college experience results in a well-rounded individual with the vital set of knowledge and skills for success in entry-level positions. The combination of soft skills and job-specific skills learned in college also contributes to better career advancement opportunities. Employers consider soft skills like written and oral communication, ethical judgment, critical judgment and problem-solving skills as the most desirable. 

What Are the Factors that Influence Graduate Earnings Premium (GEP)?

First, where you earned your bachelor’s degree may matter in terms of the position and compensation package you’re offered. In a study presented at the American Sociological Association’s 2016 annual meeting, researchers found that graduates of the most selective four-year colleges and universities enjoyed significant earnings payoff. 

Even with other factors including academic measures, socioeconomic status, and choice of major being controlled, the results still pointed to the crucial influence of prestige and reputation on GEP. A decade after graduation, graduates of the most selective schools earn 8% more than their peers at highly selective, but not the most competitive, schools. They also earn 11% more than those from competitive colleges and 19% more from non-competitive schools. 

Second, what occupation or profession you’re engaged in also has its impact on GEP. In a 2020 US News article, nine out of the ten majors with the best entry-level salaries are in the engineering sector, namely: (Median starting salary and best college for the type of major) 

  • Aerospace, aeronautical and astronautical engineering ($62,350; Massachusetts Institute of Technology) 
  • Mechanical engineering ($62,400; SUNY Maritime College) 
  • Nuclear engineering ($62,550; University of Tennessee) 
  • Materials engineering ($63,300; University of Michigan Ann Arbor) 
  • Computer science ($64,450; Brown University) 
  • Chemical engineering ($64,750; Rice University) 
  • Industrial engineering ($65,250; Northwestern University) 
  • Electrical, electronics and communications engineering ($67,000; MIT) 
  • Petroleum engineering ($67,150; Texas A&M)
  • Computer engineering ($69,300; University of Washington Bothell) 

Indeed, graduates of engineering programs are more likely to enjoy higher GEP at 125%. In comparison, social work and psychology majors have the lowest GEP at 40%. The difference in GEP is about 25%, a sizable difference that may influence your decision in a college major. 

Third, where you are also has an impact on GEP. The variation in GEP due to geographical location was outlined in a Thomas B. Fordham Institute study titled, “What You Make Depends On Where You Live: College Earnings Across States and Metropolitan Areas”. In it, researchers found a significant difference in average annual earnings between employees with and without college degrees depending on their state of residence, as well as between workers in urban and rural settings. 

The State of New York with its 103.3% GEP has the largest earnings premium. With GEPs between 101% and 87%, Georgia, California, the District of Columbia, New Jersey, Connecticut, Virginia, North Carolina, Illinois, and Texas came in second to ninth place. These are among the country’s most prosperous and populous states, too. 

In contrast, Wyoming has the lowest GEP at 21.3%. North Dakota, Alaska, South Dakota, Montana, West Virginia, Iowa, Mississippi, Vermont, and Hawaii have GEPs between 24.3% and 52.3%. Such low GEPs may be attributed to the states’ fairly small populations, mostly rural settings, and significant reliance on their natural resources for their economies. The predominant industries are centered on agriculture, oil, gas and coal. 

Take note that the national GEP average is 84.7%.  

GEP - FAQ - fact 2

Fourth, your race and ethnicity can also influence GEP. Asian and Caucasian workers tend to earn higher compensation than their Hispanic and black counterparts with the same or similar educational level. The premium is highest for Asian workers at 61%, followed by whites at 55.9% and Hispanics at 36.7% and blacks at 38.2%. 

What Are Its Implications?

Of course, there will always be exceptions to the norm. In general, nonetheless, we can assume that a college education pays off well because of the greater opportunities for better employment. Beyond the economic benefits, a college education also provides non-monetary benefits including: 

  • Reduced risk of unemployment and poverty 
  • Increased likelihood for health insurance, retirement plan and early retirement, and occupational prestige 
  • Improved odds for life expectancy, quality of life, and happiness 

Nowadays, graduates face increased demands of working with new technologies, understanding and integrating social media and marketing’s role in business processes, among others. They also have an extraordinary opportunity to maximize their graduate earnings premiums by using their time at university to build key networks of friends, professors and business associates. Although the value of graduate earnings premiums varies by industry and year-to-year, the long-term benefit in earning power remains extraordinary.

Are you ready to learn more? Check this out: Graduate Earnings Premiums From Independent Schools: What You Should Know