Compositional Shift and the Returns to Higher Education in the Netherlands

Over the past few decades, the Netherlands has witnessed a significant rise in the proportion of individuals pursuing higher education due to a reduction in educational frictions. At the same time, the earning gap between graduates and non-graduates has declined. I investigate whether this evidence can be explained by a compositional shift among graduates. University expansion might not only modify graduates’ composition in terms of socioeconomic characteristics, but it might also impact their distribution of ability level. A lower level of ability translates into a deterioration of the returns in the labour market. I investigate the evolution of the returns to higher education by using a nonparametric bounds approach. Results suggest that even in the presence of compositional shift, the returns of the graduates are positive.