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International Journal of Educational Development 28 (2008) 259–267

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The economic benefits of higher education in Cyprus: Theexpectations of prospective students

Maria Eliophotou Menon�

Department of Education, University of Cyprus, P.O. Box 20537, Nicosia 1678, Cyprus

Abstract

The paper investigates the economic benefits and costs of higher education as these are perceived by higher education

candidates and labour market entrants in Cyprus. It provides further evidence on the topic after a similar study which

preceded the present project by 10 years. Perceived rates of return to education are presented for two points in time,

namely, 1993 and 2003. The findings point to an increasing awareness of the link between education and earnings on the

part of young people, which can be linked to the country’s economic development. The main influences on the respondents’

expected lifetime earnings are examined through multiple regression analysis. Gender and ability are found to be

significantly related to expected earnings.

r 2007 Elsevier Ltd. All rights reserved.

Keywords: Educational policy; Economics of education

1. The context

Since the early 1960s, human capital theory hasprovided the framework for the investigation of theeffect of education on earnings. Studies of earningsand education in several countries confirm apositive association between the two as educatedindividuals earn more, on average, compared to theless educated or less qualified. In addition toeducation, several other factors have been suggestedas influences on earnings such as gender, ability,race, religion, size of employer, city size, etc. Thepositive effect of education on earnings is believedto encourage young people to continue theireducation beyond the compulsory level. In thisframework, it is assumed that prospective students

e front matter r 2007 Elsevier Ltd. All rights reserved

dudev.2007.04.001

22751012; fax: +357 22753702.

ess: melmen@ucy.ac.cy.

have an accurate perception of the relationshipbetween earnings and education. Even though thecore of human capital theory rests on this assump-tion, very few studies have attempted to examine therelationship between the perceived economic bene-fits of additional education and the intention topursue it. The lack of relevant evidence on the topicis commonly attributed to the reluctance ofeconomists to collect subjective data (Manski,1993; Botelho and Pinto, 2004).

In recent decades, the use of subjective data in thestudy of the relationship between education andearnings has increased, as witnessed by a number ofrelevant studies: one of the first studies on theexpected economic benefits of education was con-ducted by Williams and Gordon (1981) in theUnited Kingdom. The study was aimed at investi-gating the relationship between educational qualifi-cations and average earnings as perceived by

.

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English students at the end of their compulsoryeducation. Respondents were asked to provide anestimate of expected earnings at three points in time(point of starting work, age 26, and age 46). Theage-earnings profiles that were constructed on thebasis of the information provided indicated thatpupils had a reasonably accurate perception of theearnings implications associated with additionaleducational qualifications. Male students werefound to expect higher earnings than their femalecounterparts. The findings of the Williams andGordon study regarding the accuracy of earningsexpectations were in agreement with findingsreported by Psacharopoulos and Sanyal (1981,1982) on student expectations and labour marketconditions in the Philippines and Egypt. In bothcountries, the university students included in thesample had realistic expectations of the structure ofearnings in the labour market.

The Williams and Gordon model was laterreplicated in Hong Kong by Wong (1989), whoalso found students to be realistic in their percep-tions of expected earnings. The intended level ofeducation had the strongest influence on expectedearnings and was followed in importance by familybackground. Ability and institutional quality hadsignificant but small effects on earnings. A similarmodel was used to examine the perceived economicbenefits of higher education in Cyprus (Menon,1997a). The findings were supportive of humancapital theory in that secondary school studentswho intended to enter higher education expectedtheir earnings to increase considerably as a result.The student’s secondary school specialisation andparental education had a significant effect onexpected earnings. Parental education was signifi-cant in the case of boys, while socioeconomic statuswas significant in the case of girls.

The accuracy of students’ perceptions regardingtheir future earnings with higher education is alsosupported by the findings of a study by Betts (1996).In this case, a sample of undergraduate students wasasked to estimate the average earnings of differenttypes of employees at the point of labour marketentry and after several years of labour marketexperience. According to the findings, students hadan accurate perception of the earnings differentialassociated with a college degree. Dominitz andManski (1996) also found students to be aware ofthe relationship between education and earnings.Moreover, Carvajal et al. (2000) reported thatthe earnings expectations of college seniors were

generally in accord with the labour market experi-ence of recent graduates even though they identifiedcases of underestimation or overestimation of theeffect of certain variables on earnings.

Recent studies of the earnings expectations ofuniversity students conducted in several Europeancountries also render support to the ability ofstudents to provide accurate estimates of futureearnings. In Switzerland, Wolter (2000) reportedthat the estimates of future wages did not deviatesignificantly from the existing observable wagestructure. Brunello et al. (2001) asked a sample ofuniversity students from 10 European countries toprovide forecasts of wages for themselves and for a‘‘typical graduate’’. Expected earnings gains with auniversity degree were found to be close to thecorresponding actual gains. Female students ex-pected to earn significantly less than males both atthe point of labour market entry and 10 years later.In the Netherlands, Webbink and Hartog (2004)compared students’ expected earnings in 1991 withrealised earnings in 1995. They reported the leveland the structure of expectations and realisations tobe remarkably close. Finally, Botelho and Pinto(2004) examined students’ expectations of theeconomic returns to college education in Portugal.They found students to be aware of the economicreturns to college education. In agreement withother studies, female students expected lowerreturns to college education compared to males.

Overall, the findings of available studies on theperceived link between education and earningsindicate the following: first, students appear to beaware of the positive effect of education andearnings. Moreover, their expectations regardingfuture earnings are largely realistic, indicating thatthe reluctance of economists to collect subjectivedata may not be justified (Botelho and Pinto, 2004).Second, the effect of variables other than educationon expected earnings appears to vary across studies.The only possible exception is that of gender in thatmost studies report women to have significantlylower earnings expectations than men. Taking theseinto account, the present study aims at investigatingthe link between a student’s educational intentionsand his/her expected lifetime earnings. More speci-fically, the study examines the expected earningsdifferential between higher education graduates andsecondary school leavers, as this is perceived byhigher education candidates and labour marketentrants. Data regarding the perceived costs andbenefits of higher education are used to estimate

ARTICLE IN PRESSM.E. Menon / International Journal of Educational Development 28 (2008) 259–267 261

expected rates of return for both groups. Theestimated rates are compared to previous rates forthe same country. Moreover, the study attempts tomeasure the effect of several non-economic vari-ables on the earnings expectations of young peoplein Cyprus.

The investigation of the earnings expectations ofsecondary school graduates can be useful in theattempt to provide corroborating evidence for thehuman capital interpretation of the private demandfor higher education. Moreover, this investigationcan serve as the basis for planning and policydecisions associated with the analysis and theprediction of private demand. The methodologyfor the study is largely provided by earlier papers onthe topic (Menon, 1997a, b). Both studies took placein Cyprus, with data collected at two points in time,namely, 1994 and 2004. The present study presentsfurther evidence on the perceived economic benefitsof higher education in Cyprus and provides thebasis for a longitudinal study of the topic.

2. The background

Cyprus is a small Mediterranean country, whichjoined the European Union on May 1, 2004. Afterpolitical turmoil and armed conflict in the 1970s, theRepublic of Cyprus undertakes educational provi-sion in the government-controlled southern area ofthe island. In the educational system of the Republicof Cyprus, there are three main educational levels,namely, pre-primary and primary education, sec-ondary general education and secondary technicaland vocational education, and higher education.The system also provides for adult education andeducation for people with special needs.

As regards tertiary education, there are threestate-accredited institutions in the country, whileprivate colleges are currently undergoing an evalua-tion–accreditation process that is expected to resultin the granting of university status to a smallnumber of institutions. The expansion of highereducation in recent decades has been phenomenaland is largely due to the constant increase in privatedemand. According to the latest figures of theDepartment of Statistics and Research (2006),about 75% of secondary school graduates chose toenter higher education in 2004/2005. The very hightertiary education participation rate is commonlyattributed to a wide range of factors, which includesocietal and economic forces as well as individualand psychological variables. Studies of the demand

for higher education point to the importance ofeconomic and occupational variables as demand-influencing factors: secondary education graduateshave been reported to consider higher educationnecessary for a highly paid, secure public-sector job(Menon, 1998).

According to the Cyprus Strategic DevelopmentPlan for 2004–2006 (Planning Bureau, 2003), themain problems linked to tertiary education in thecountry are the limited opportunities available inCyprus for tertiary education graduates and theinability of the educational system to respondquickly to labour market needs. These problems,coupled with the deficiencies of the existing counsel-ing and professional orientation system, are con-sidered responsible for higher education choices onthe part of young people that are not in tune withthe needs of the labour market. Even though theunemployment level is relatively low (3.6% in 2004),there is concern regarding the future employmentprospects of graduates as more employment sectorsbecome saturated. In an attempt to enhancegraduate employment, the Strategic DevelopmentPlan points to the need for the qualitative upgradingof the tertiary education system, and the enhance-ment and upgrading of training and retrainingstructures. In this context, the study of the expecta-tions of prospective higher education students canbe expected to provide useful information to policymakers. Educational planners and policy makerscan use information relevant to these expectationsin order to plan more effective communicationstrategies with higher education candidates. This, inturn, will require the upgrading of the counselingand professional orientation system, which isconsidered necessary for prospective students andtheir parents to make more informed highereducation choices.

Measures to promote more informed choices inhigher education will not only benefit the individualdecision makers but society as a whole. At present,the economy of the Republic of Cyprus faces manychallenges, the most important of which is theprospect of reunification of the northern andsouthern parts of the island. Moreover, the coun-try’s recent accession into the European Union isassociated with new opportunities and challengesfor its small economy. In this framework, it isimportant to enhance the quality of the workforcethrough effective and flexible education and trainingsystems. Information on the expectations andchoices of prospective higher education entrants

ARTICLE IN PRESSM.E. Menon / International Journal of Educational Development 28 (2008) 259–267262

can provide the basis for the design and upgradingof the educational system in ways that will allow thesatisfaction of both societal and individual needs.

3. Methodology

Data were collected through surveys from asample of 605 students enrolled in the final year oftheir secondary education at both general (aca-demic) and technical (vocational) public schools inCyprus in the year 2003/2004. An attempt was madeto cover a wide geographic area by includingstudents from both urban and rural areas.

Respondents were asked to provide informationon their intentions with respect to the choicebetween higher education and employment aftergraduation from secondary school. They were alsoasked to provide an estimate of expected monthlyearnings with and without a higher educationdegree. Specifically, respondents gave estimates offuture expected earnings at three points in time(point of starting work, after 4 years of work, age46) with and without higher education. Based on theexpected monthly earnings estimates provided byrespondents for the three points in time, expectedlifetime earnings were computed for each pupil. Itwas assumed that earnings rise linearly between thespecified points and that peak earnings are reachedat age 46 and remain at this level until retirement.The following variation of the formula suggested byWilliams and Gordon (1981) was used in thecomputation of expected lifetime earnings:

ELE ¼ 0:5ðA4 � AÞ � ðE1 þ E2Þ

þ 10� ðE2Þ þ 23� ðE3Þ,

where ELE is the estimated expected lifetimeearnings, A the assumed age of starting full-timework, A4 the age at 4 years of work (hence A4�A isalways equal to 4), E1 the expected annual earningswhen starting full-time work, E2 the expectedannual earnings at age A4 and E3 the expectedannual earnings at age 46.

With the above formula, lifetime earningswere computed in the case of a higher educa-tion entry. The same formula was used in the caseof a direct labour market entry, with the coefficientof the second time point (E2) changed from 10 to14 to account for the fact that direct labourmarket entrants work about 4 years longer thanhigher education graduates due to their earlieremployment.

Students also provided estimates of the directmonthly costs they or their family would have toincur if they entered higher education. Again, thiswas done for both groups of students (labourmarket entrants and higher education candidates).The estimates of the expected benefits and costs ofhigher education were used to estimate perceivedrates of return. The available data allowed for theuse of the elaborate or full method, which isconsidered to provide the most accurate estimates(Psacharopoulos, 1981). This method is based onthe algebraic definition of the rate of return whichequates the stream of benefits of an investment to itsstream of costs. The elaborate method was preferredto a second method used in the estimation of ratesof return, known as the short-cut method (Psachar-opoulos, 1981) since the latter focuses on earlyearnings, leading to less accurate estimates. Finally,a third approach to the estimation of rates of returnproposed by Mincer (1974) was not used due to itsshortcomings. According to Psacharopoulos andPatrinos (2004), this method has been mistakenlyused to report returns to education when it actuallyestimates wage effects. The estimated rates of returnwere compared to previous estimates for the samecountry, thus allowing for an examination ofchanges in the perceived benefits and costs of highereducation in a 10-year period.

In the questionnaire, respondents also providedinformation on a number of individual/demo-graphic characteristics. These were subsequentlyentered as independent variables in a multipleregression model, while the student’s expectedlifetime earnings served as the dependent variable.The dependent variable referred to the expectedlifetime earnings figure that corresponded to thestudent’s actual intentions. Thus, for those intend-ing to work after secondary school graduation, theexpected lifetime earnings associated with thisscenario were entered in the regression equation.Similarly, for students planning to enter highereducation, the expected lifetime earnings for thisintention were used in the regression model.

The regression model used in this and theprevious Cyprus study (Menon, 1997a) was basedon the methodological approach adopted by Wil-liams and Gordon (1981). In the present study, anattempt was made to arrive at a model which couldexplain a higher percentage of the observed variancethan that explained by the previous model. Speci-fically, the following variables were entered in theanalysis: logarithm of expected lifetime earnings

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Table 1

Expected lifetime earnings of respondents intending to work or

study with and without higher education (in Cyprus poundsa)

Group Mean Median Standard

deviation

Intending to work

Without higher

education

494 811 411 450 304 391

With higher

education

665 795 547 300 410 849

Intending to study

Without higher

education

359 946 325 000 191 931

With higher

education

677 505 616 200 314 894

aC£1 approximately equal to STG£1.17 in 2007.

M.E. Menon / International Journal of Educational Development 28 (2008) 259–267 263

(LnELE), educational intentions (EI), sex (S),secondary school specialisation (SPEC), area ofresidence (AREA), socioeconomic status (SES),ability (ABIL), extrinsic motivation (EXMOT),and intrinsic motivation (INMOT).

The logarithm of expected lifetime earningsserved as the independent variable in the regressionmodel.1 For the independent variables, the follow-ing categorisations were made: the EI variable wasdivided into students intending to study andstudents intending to work; S was divided intomales and females; SPEC was divided into academicand technical streams; AREA was divided intourban and rural family residence; SES was dividedinto high and low socioeconomic status; ABIL wasdivided into high and low ability (based onsecondary school performance); EXMOT andINMOT were divided into high and low extrinsicand intrinsic motivation for higher education,respectively. In order to provide measures of thelatter, respondents were asked to indicate the extentto which they had been influenced by the financialbenefits of tertiary education (extrinsic motivation)and by its non-financial benefits (intrinsic motiva-tion) in deciding to pursue higher studies.

4. Results

4.1. Perceptions of earnings/costs of higher

education, and expected rates of return

The vast majority of students (86%) intended toenter higher education. This was expected given thehigh demand for post-compulsory education inCyprus even though it is probably an overestimateof the actual proportion of students who finallyenter higher education. It is common for somestudents intending to enter higher education tochange their plans if they fail to gain admission totheir preferred field of study and/or institution. Inrecent years, this has resulted in a final highereducation entrance rate ranging between 65% and75%.

Table 1 shows the mean, median and standarddeviations of the expected earnings estimatessupplied by respondents with and without higher

1The logarithmic form of the expected lifetime earnings

variable was chosen to conform to the general form of the

earnings function proposed by Mincer (1974). In the Williams

and Gordon (1981) model, the absolute form of the variable was

used instead.

education, and for both the ‘work’ and the ‘study’groups. The respondents who intended to studyexpected to earn much more with tertiary education,with their expected earnings almost doubling as aresult of a higher degree. Those intending to workwere also aware of the fact that higher degreescarried an earnings premium but they estimated thispremium to be much lower than that expected byhigher education entrants. Whereas tertiary educa-tion entrants expected to earn, on average, about£317 000 more with higher education, labour marketentrants estimated a premium of about £171 000.

The two groups appear to be in agreement in theirestimations of the expected lifetime earnings withhigher education as their estimates differed by amere £11 710. However, in the case of labour marketentry, the difference was much higher in that highereducation entrants believed that if they were to enterthe labour market instead, their lifetime earningswould amount to £359 946, about £135 000 less thanthe figure expected by labour market entrants underthis scenario. Thus, the analysis of the expectedlifetime earnings data supplied by respondentssuggests that the students’ intentions in relation tothe choice between higher education and employ-ment were associated with differences in theperceptions of the economic premium of highereducation degrees. Higher education entrants con-sidered higher education to be a better investmentthan labour market entrants, even though the latteralso recognised the positive effect of education onearnings.

If we compare these findings to those of theprevious Cyprus study, a notable difference emerges:

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Table 3

The perceived unadjusted mean rate of return to higher education

in 1993/1994 and 2003/2004

Mean elaborate rate of return

1993/1994 2003/2004

All students 5.7 8.7

Intending to work 1.5 3.6

Intending to study 6.7 9.4

M.E. Menon / International Journal of Educational Development 28 (2008) 259–267264

in the 1994 data, labour market entrants did notassociate a sizable earnings premium with highereducation as they expected to earn only about £20 000more with higher education, as opposed to the£171 000 found in the present study. The findingssuggest that in the last 10 years, Cypriot studentshave gained greater awareness of the financial benefitsassociated with higher degrees. This could be theresult of the increasing trend towards higher educa-tion in the country and the associated ‘promotion’ ofthe benefits of higher degrees by Cypriot parents, whoare known to strongly encourage their children toenter tertiary education. Consequently, even labourmarket entrants are now aware of the fact that theirchoice with respect to higher education and employ-ment will have a negative effect on their futureearnings.

Table 2 presents the mean, median and standarddeviations of the expected higher education monthlycost estimates supplied by respondents for boththe ‘work’ and the ‘study’ groups. The mean figuresare close, with higher education entrants estimatingthe monthly cost of higher education at £593 asopposed to the £550 estimate provided by labourmarket entrants. It appears that both groups ofstudents gave realistic estimates of the costs ofhigher education. The present findings differ fromthe 1994 estimates in that labour market entrants atthe time gave much higher estimates of the cost ofhigher education than higher education candidates:the former estimated the monthly cost of highereducation at about £719, while the latter gave amuch more modest estimate of £469.

The estimates of perceived earnings and costswere used to compute rates of return, which weresubsequently compared to earlier estimates for thesame country. The mean values for the perceivedrate of return to higher education as estimated bythe elaborate method are shown in Table 3. As seenin Table 3, the overall mean unadjusted rate ofreturn to education in 2003/2004 stood at 8.7%. Therespondents who intended to enter higher educationwere found to expect a much higher rate (9.4%)

Table 2

Perceived monthly costs of higher studies (in Cyprus poundsa)

Intention Mean Median Standard deviation

Work 550 500 392

Study 593 500 399

aC£1 approximately equal to STG£1.17 in 2007.

compared to labour market entrants (3.6%). It isobvious that the latter did not consider highereducation to be a good investment, which partlyexplains their decision not to pursue it.

Table 3 also presents the mean values of theelaborate perceived rates of return at a previouspoint in time, namely, 1993/1994. The comparisonof the rate of return estimates in 1993/1994 and2003/2004 points to an increase for all groups (allrespondents, respondents intending to work, re-spondents intending to enter higher education).Specifically, for all respondents, the rate of returnhas gone up from 5.7% to 8.7%, recording a 52.6%increase. As regards labour market entrants, theirrate of return has gone up from 1.5% to 3.6%,which represents an even higher rate of increase(140%). However, as previously noted, the 2003/2004 rate of return estimate for this group is stilllow. The highest mean rate was recorded forstudents intending to enter higher education(9.4%). This group provided a more modestestimate of 6.7% in 1993/1994. Overall, the findingsindicate that the majority of respondents in 2003/2004 were more aware of the positive earningsdifferential in favour of higher education graduatesthan their 1993/1994 counterparts.

4.2. Perceived earnings functions

The results of the regression analysis for thewhole sample, and for boys and girls separately, areshown in Table 4. As shown in the table, threevariables were found to have a significant effect onexpected lifetime earnings: the student’s educationalintentions, sex, and ability. The positive sign of theeducational intentions variable indicates that stu-dents who intended to enter higher educationexpected to earn more than those who planned toenter the labour market instead. Girls expected toearn less than boys, while higher ability studentsexpected to earn more than their lower ability

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Table 4

Regression coefficients and t-ratios (in parenthesis) for whole sample, boys and girls

Independent variable Whole sample Boys Girls

Constant 12.988 (231.24)��� 12.983 (201.73)��� 12.791 (61.24)���

EI 0.258 (5.52)��� 0.334 (4.98)��� 0.143 (2.37)�

S �0.225 (�5.21)��� – –

SPEC �0.042 (�0.87) �0.054 (�0.80) �0.011 (�0.18)

AREA 0.071 (1.77) 0.118 (2.07)� 0.602 (�0.32)

SES �0.033 (�0.83) �0.046 (�0.80) �0.024 (�0.41)

ABIL 0.224 (5.09)��� 0.161 (2.67)�� 0.283 (4.60)���

EXMOT 0.071 (1.72) 0.075 (1.27) 0.072 (1.23)

INTMOT �0.052 (�1.27) �0.067 (�1.16) �0.035 (�0.60)

N 605 300 305

R2 0.159 0.178 0.127

F 12.81��� 8.15��� 5.63���

�po0.05.��po0.01.���po0.001.

M.E. Menon / International Journal of Educational Development 28 (2008) 259–267 265

counterparts. The findings, especially in relation tothe educational intentions and gender variables,point to a realistic assessment of the structure ofearnings in the labour market. The positive effect ofeducation on earnings and the female earningsdisadvantage have been reported in numerousstudies conducted in different countries. It is alsoreasonable for higher ability students to hypothesisethat they will earn more than their low abilitycounterparts. Thus, taken together, the findingspoint to realistic expectations of future earnings onthe part of young people in Cyprus.

The two social background variables (area ofresidence and social class) were not found to have asignificant effect on expected lifetime earnings. Thesame is true of secondary school specialisation, withstudents in technical specialisations expecting toearn as much as those following academic streams.The two remaining variables concerned extrinsicand intrinsic motivation in the pursuit of highereducation. They were not significant at the a ¼ 0.05level, even though the first variable was marginallynon-significant, pointing to a tendency on the partof students who were motivated to enter tertiaryeducation because of its financial benefits to expecthigher earnings with a tertiary education degree.

The findings of this study are not identical tothose reported in the previous Cyprus study,indicating that the factors influencing earningsexpectations may change over time. Secondaryschool specialisation was highly significant in 1994but is no longer significant, as a result, perhaps, ofthe earnings potential associated with technical

skills in a country where these skills are becomingrare. More importantly, the educational intentionsvariable was not significant in 1994—a finding thatapplied to the whole sample, as well as to boys andgirls separately. As previously mentioned, the factthat in the present study, the educational intentionsvariable was significant could be associated with agrowing awareness of the economic value of highereducation on the part of young people.

The separate estimations of the regression equa-tion for boys and girls do not point to majordifferences in the effect of the independent variableson expected lifetime earnings for the two groups.For boys, ability and educational intentions had asignificant effect on expected earnings. The resi-dence variable was also significant, which was notthe case for the whole sample. The sign of thevariable indicates that male students living in urbanareas expected to earn more than those residing inrural areas. For girls, ability and educationalintentions had a significant effect on expectedearnings, a pattern which did not differ from thatobserved in the case of the whole sample. Overall,the model performed better for boys. The R2 for thewhole sample was not very high but, as noted byWebbink and Hartog (2004), this is common inindividual earnings regression estimations. Thepresent model performed better than the one ofthe previous Cyprus study for the whole sampleeven though the R2 was not much higher (0.159 asopposed to 0.144 in the previous study). As regardsgirls, the R2 reported in the present study (0.127)was lower than that reported in the previous study

ARTICLE IN PRESSM.E. Menon / International Journal of Educational Development 28 (2008) 259–267266

(0.151). For boys, however, it was much higher(0.178 as opposed to 0.074 in the previous study).

5. Conclusions and implications

The paper examined the perceptions of Cypriotstudents regarding the economic benefits of higherdegrees. Both groups of students included in thestudy, namely, labour market entrants and highereducation candidates, were found to be aware of thelink between education and earnings. However, thetwo groups had different perceptions of the size ofthe economic premium associated with highereducation: labour market entrants estimated theearnings premium of higher education at 170 984,while higher education entrants believed this pre-mium to be much higher (317 559). Consequently,and in agreement with the predictions of humancapital theory, higher education entrants consideredhigher education to be a better investment thanlabour market entrants. This is also suggested by theestimates of the perceived rate of return to educa-tion (9.4% for higher education candidates and3.6% for labour market entrants). The overallperceived rate of return increased from 5.7% in1993/1994 to 8.7% in 2003/2004.

If we compare these results to those of an earlierCyprus study, which was conducted 10 years ago,we find an important difference in the perceptions oflabour market entrants, who, in 1994 did notassociate a sizable earnings premium with highereducation. A comparison of the two sets of findingssuggests that labour market entrants have becomemore realistic with respect to the financial benefitsof higher education. The same is true of the costs ofhigher education, which this group tended tooverestimate in 1994. The change in studentperceptions, as recorded in a 10-year period, maybe related to the stage of development of theCypriot economy and the associated financialrewards enjoyed by higher education graduates.The economy of Cyprus grew substantially after the1960s, with an associated increase in the demand foreducated labour. The link between earnings andeducation may have escaped a number of youngCypriots for the first few decades of economicdevelopment. However, at present, it appears thatthe awareness of the link between education andearnings is characteristic of the whole population.Consequently, the present findings may point to arelationship between the development of a country’s

economy and the accuracy of individual perceptionsof the structure of earnings in the labour market.

The realism of students’ perceptions is furthersupported by the results of a regression estimation,which examined the effect of several independentvariables on the students’ expected lifetime earnings.In the estimation of the equation for the wholesample, the following three variables were found tohave a significant effect on expected lifetime earn-ings: the student’s educational intentions, sex andability. Students who intended to enter highereducation expected to earn more than labourmarket entrants. Girls expected to earn less thanboys, while higher ability students expected to earnmore than their low-performing counterparts. Thesefindings show an accurate perception of thestructure of earnings in the labour market as theyconform to existing prevalent trends. This applies tothe separate estimation of the model for boys andgirls, which resulted in similar findings to thoseobserved in the case of the whole sample. The onlydifference concerned the area of residence variable,which was significant for boys, indicating that malestudents residing in urban areas expected to earnmore than those residing in rural areas.

Taken together, the findings indicate that highereducation entrants are likely to be influenced bytheir perceptions of the expected earnings associatedwith a higher degree. However, it must be noted thatthe perception of a positive earnings differential infavour of higher education graduates will notnecessarily lead to a decision to enter highereducation. Several non-economic variables havealso been linked to the decision to pursue higherstudies including demographic, psychological, so-ciological and institutional characteristics (see, e.g.Borus and Carpenter, 1984; Guppy and Pendakur,1989; Jimenez and Salas-Velasco, 2000; Hayden andCarpenter, 1990; Kodde and Ritzen, 1988; Menon,1998; Sander, 1992).

The findings have important policy implicationsin that they provide the basis for an examination ofhigher education demand patterns in Cyprus. Oneaspect of these findings that merits further investi-gation is the increase in the perceived benefits ofhigher education. The increase in the expected rateof return to higher education, despite the abundanceof higher education graduates, may suggest thatyoung people took into account the prospects of theCyprus economy after the country’s accession tothe European Union. It is important to note thatthe data for the present study were collected in the

ARTICLE IN PRESSM.E. Menon / International Journal of Educational Development 28 (2008) 259–267 267

Spring of 2004, shortly before Cyprus’ accession,which took place in the same year. Thus, prospec-tive higher education entrants may have consideredthe fact that EU accession increased their employ-ability by allowing them to seek employmentoutside the small economy of an island country. Ifthis is the case, educational planners and policymakers need to address the likelihood of brain drainin the country. In order to be in a position toeffectively address the opportunities and challengesit faces, Cyprus needs to rely on an educated andinformed population. Consequently, it is importantthat measures should be taken to enhance theemployment prospects of young Cypriots in theirown country.

In conclusion, the findings of the two Cyprusstudies point to the fact that student perceptions ofthe financial benefits of higher education and thefactors that influence them do not remain stableover time. Changes could be more pronounced incountries undergoing economic change and/ordevelopment. Overall, the results of the presentstudy suggest that longitudinal studies provide avaluable insight into the perceptions of individualsregarding the expected financial benefits of highereducation. The degree of realism associated withthese perceptions can serve as evidence for thehuman capital interpretation of educational choicesas investment decisions. On a less theoretical level, itcan also provide an evidence base for planning andpolicy decisions regarding the demand and supplyof higher education.

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