What Explains the Differential ‘Sheepskin Effect’ by Ethnicity and Immigrant Status in the UK? The Role of Degree Choice and Occupational Sorting

The so‐called “sheepskin effect”, or credential effect, is concerned with the extent to which labour market returns to diploma years exceed returns to other years of education. We revisit the sheepskin effect in a unified framework to examine the separate roles of both ethnicity and immigration in returns to academic qualifications for UK‐educated minorities and white natives, defined by country of birth. Conditional on attained academic qualifications, we find that white natives generally have higher returns to years of schooling. In contrast, minorities have larger returns for higher academic credentials than whites, especially for minority immigrants. Our Unconditional Quantile Effect results using the Recentered Influence Functions (RIF) approach suggest that systematic differences by ethnicity in degree subjects, university selectivity and degree quality account for most of the differential sheepskin effects. Importantly, leveraging the 1988 GCSE reform and subsequent expansion in higher education opportunities, we further show that ethnic minorities disproportionately benefited from an increase in returns to first degrees, especially for those with lower‐middle abilities. Our findings are consistent with endogenous human capital investment and differential assortative matching of skills to jobs by minorities in anticipation of labour market discrimination.