What is a Wage Premium? Definition & Examples

A wage premium is a higher wage rate earned by employees in a specific job or profession relative to the wages of other workers performing similar work. A wage premium may be due to a number of factors, including education, skill level, experience, and rarity of the skill.

The existence of a wage premium is an important indicator of labor market tightness and can help employers attract and retain high-quality employees.

In some cases, it may also lead to increased economic growth as workers move from lower-paying jobs that low-income earners get to those with higher premiums.

If you want to find out more about average wages, What is a wage premium, and the rising wage inequality, continue reading this article.

Wage Premium Defintion

A wage premium is a term used to describe the extra money that certain employees may earn, relative to other jobs that are less appealing but nonetheless vital in society. It’s what allows people with undesirable occupations the chance to make a decent living doing what they love.

At the same time, a wage premium is an amount of money that one earns for completing the same job (e.g. experience, hours) in the workplace as someone who is of lower education.

College Wage Premium

College graduates earn more money than those without a college degree. This is known as the college wage premium.

For example, a non-graduate individual might be paid $50 per hour, for instance, whereas a college graduate can expect to be paid $70 per hour. The wage gap reflects the reality of the heightened skills of people with college degrees.

The income received by the former is way higher because a college graduate has a diploma and is expected to possess more skills compared to someone who was not able to obtain a degree.

College Educated Workers

As a general rule, it is understood that people who have a college degree or higher educational attainment strongly influence wages through augmented productivity.

For example, many entry-level positions in manufacturing or production require few skills and are performed in a relatively similar manner no matter what company is doing it.

Because of this standardized level of skill required for these types of jobs, it means that everyone performing them will be paid an average wage given what they offer to the employer.

What if one of these employees goes for higher education? This could allow them to obtain a position as an architect or engineer where what is considered average skills in manufacturing are now what would be needed for high-level jobs.

What this means then is that what was once considered average-skill work, like what’s done in manufacturing positions, would be compensated at a different rate than what was once considered a high skill.

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College Degree and Wage Premiums

There is a large body of research that shows that there is a wage premium for college graduates. This premium to wage exists in both the public and private sectors and for workers with varying levels of education.

College Graduate vs. High School Graduates

The majority of research on this topic finds that the premium to wage for college graduates is growing over time.

For example, one study published in 2006 found that the wage distribution for college graduates was about 50 percent higher than for high school graduates.

A more recent study published in 2016 found that the wage premium had grown to about 80 percent higher than for high school graduates.

There are many reasons for the wage gap between college graduates and high school graduates. Employers tend to view college degrees as a signal of intelligence and the capacity to learn new skills.

College degrees are thus often associated with workers who are more motivated, skilled, and productive—all factors that can justify higher wages.

What is human capital?

On the whole, what this means is that workers who have higher levels of education are more likely to be better at finding new jobs when previous ones are lost or being able to ask for better wages when negotiating with their current employers.

What is human capital accumulation?

As people accumulate more college education, they become more proficient at doing their job and generating revenue for their employers.

This process of accumulating human capital may explain why some people who are considered advanced degree holders are more likely to have jobs even during periods of high unemployment when the overall population tends to have a harder time finding work.

One study found that college graduates had about a 15 percent lower chance of becoming unemployed than those with only a high school degree. This same study has also shown that college graduates are less likely to be laid off from their jobs.

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Trends in College Wage Premiums

The university premium wage is a measure of the average wage per hour for those with a bachelor’s degree or higher, compared with the average wage per hour for those with no degree.

A recent study has found that there is a considerable amount of variation in the college wage premiums across states and metropolitan areas. This study found, for example, that individuals with bachelor’s degrees generally tend to earn higher wages in Midwestern and Northeastern states than what is typical in other areas of the country.

Can differences in race result in lower wages?

Research has also found that the college premium wage varies considerably across racial groups. For example, one study found that black men with at least a bachelor’s degree earn 18 percent less than similarly credentialed white male workers.

These findings suggest that what individuals earn is often related to what their potential employers believe about what they are capable of doing.

What is the relationship between education and unemployment?

An educated workforce also helps to strengthen what has been described as a “circle of life” for employment—which means that, when there are more jobs available for people with higher levels of education, it can help improve what opportunities are available even for less-educated workers.

This implies that those with more schooling are more mobile and eager to move to a new location or company where they can continue to add value to their field.

What do you need to do?

Even when there is demand for all college graduates overall, it might be worth considering majoring in something specific if you want a lucrative future ahead.

For example, what is known as “hard” science fields are more likely to have actual labor shortages. This means that students who are advanced degree holders in these disciplines would be what economists call “rare birds” when it comes to the job market.

While many hard sciences are related to engineering and technology, what has been described as “soft sciences” has also been able to boost the added value of having what are often higher wages as well.

Conclusion

The college wage premium is the difference between a person’s average hourly salary after graduation and his or her income before graduation. As previously noted, it is a measure of the typical earnings per hour for someone with a bachelor’s degree or higher versus those without a degree.

After one year in school, your income could be as much as $17k more than if you had not gone to college at all.

We hope this post has been informative and we encourage you to subscribe to our newsletter which will provide updates on new research studies like these so that you can stay up-to-date about what’s happening in education today!

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