Vocational Education and Earnings Growth: Human Capital vs. Firm Sorting

This paper examines how post-16 educational tracking into academic and vocational pathways shapes early-career earnings trajectories, and through which mechanisms these differences arise.

Using population-wide linked education and tax records from England, we document not only differences in earnings levels, but mainly substantial divergence in earnings growth between academically and vocationally educated workers over the first twelve years of labor market experience. While the previous literature has favored skills-based explanations, we explore the role of firm sorting as a potential driver of this divergence. For this, we (statistically) decompose earnings growth into instantaneous returns to job moves, sorting into firms with different returns to tenure, and education-specific returns to experience. Between-job mobility (i.e., switching to firms with higher AKM fixed effects) plays a limited role beyond the very beginning of workers’ careers. The vast majority of the gap in earnings growth is due to differential sorting into firms with higher returns to tenure and higher returns to experience among academically educated workers across firms (each accounting for roughly 40%).

Overall, the results highlight the importance of firm heterogeneity and sorting in understanding the labor market consequences of educational tracking, complementing human-capital-based explanations.

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