Labour Market Returns of Higher Education Drop-Outs: Human Capital or Signalling?

In Germany, around one fourth of all first year students leave university without a degree. While reasons for drop out are well examined, the consequences are rather unknown, especially in terms of labour market outcomes. This paper aims at identifying differences in school-to-work transitions between tertiary education graduates and dropouts as well as students who did not participate in tertiary education but completed vocational training after upper secondary education. Referring to Human Capital Theory and Signalling Theory we examine if additional years of tertiary education or rather credentials deliver higher returns to tertiary education non-completers. We also examine in which way the lack of formal qualifications can be compensated by alternative resources like social capital. In a first step we study the probability of entering the labour market. The further step comprises the close scrutiny of job quality (occupational status of the first job) and adds information about social capital to the analyses. Our results show that higher education drop outs in Germany do have difficulties entering the labour market but obtain a higher occupational status job than students with vocational training. Furthermore for dropout students, years spend in education are important, especially in terms of occupational status. The acquired human capital however, can be better translated into labour market returns by those with better social capital. We therefore conclude that social networks are an important compensation strategy for a lack of credentials.