What’s the real value of a college education?

2009 October 11
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By David Annis
Article ID: 1340

Today I heard an advertisement on the radio urging me to go back to college.  “College graduates make a million dollars more over a lifetime,” the advertisement said. It directed me to a website where I could find a college to attend.  South Dakota State University has a page that breaks out the earnings differences in great detail. We get information like, “Workers with bachelor’s degrees receive a 48 percent higher wage rate.  Those with a master’s, Ph.D., or professional degree receive the highest earnings differentials— about 70 to 96 percent higher than a high school graduate.”  Politicians and pundits use the higher earnings of college graduates to advocate education as a boost to our national economy.

I've always wanted to retire in Hawaii. Luckily, I plan for disappointment. Colleges use graduates’ higher earnings to convince potential students that attending will increase their income and is an investment worth making.  A University of North Texas webpage tells us “college graduates with a bachelor’s degree earn about 80 percent more per year than those who only complete high school.”  The University of Wisconsin ‘Going Back to College’ page has a section called “Value of a Degree and You”, and includes a calculator that shows how your income compares to your state average and those of people with different education levels in your state.

Unfortunately, I believe that increasing everyone’s education level by a couple of years wouldn’t significantly increase our GDP.  I first began to think about the issue skeptically while talking with faculty of a second tier university. They expressed the sentiment that they were doing a disservice to their students, saddling them with debt to pay for a degree many would not complete, and which most would never use in the working world.

I began by looking at college completion rates. I found that slightly more than half of students complete their planned four-year degrees.  Being saddled with large debts for a degree that you never attain does seem less than ideal.

Then, I thought skeptically about one of the core contentions: that additional years of education will make you more productive and lead to increased income.  The studies of how much education adds to earnings were done by selecting a sample of people and looking at their incomes and level of educational attainment.

Correlation, though, is not causation.  There could be underlying factors that make certain people both more likely to finish college and to have high incomes.  For example, having rich parents might make you better able to forgo income generation so that you have time to study. College completion may actually be a measure a student’s motivation to have high earnings, a factor which would affect the student’s income.

Just getting into a selective college might affect workplace earnings.  Admission to college requires obtaining good references and the ability to write a coherent essay, for example.  These are also important when applying for a job.  Perhaps those who already posses such skills when applying to colleges earn more than those who do not.  Writing skill may lead to better performance reviews. Those who are better able to tap a social network get better references.

Employers may require a college degree because limiting the applicant pool to those with degrees is used as a screening mechanism. Whether or not it is true, employers may believe that those who have completed college are smarter, harder working, or more motivated than those who have not.

If the college education is merely used by employers as a sorting mechanism, as a way to narrow the pool of applicants, then adding two years of college to every resume will have virtually no effect on the productivity of the country or overall wage levels. Employers would merely add two more years of college to their requirement for each position, and would achieve the same effect as what we see today.

Finally, I want to mention one other theory about how college increases earnings, though I don’t believe it is a big component.  Tyler Cowen argues that college education works via the placebo effect; it doesn’t better prepare you for work, it just makes you think that it does.  By changing your expectation of success and reward, it changes your behavior, creating a self-fulfilling prophecy.

I suspect that the real financial value of a college education is far less than correlation would make us expect.  How much less is a question I can’t answer.  Still, for some, college does provide students with certain advantages over others who don’t attend. While I don’t think we can say that a college degree equals a certain amount of increased income, I still want my children to graduate from college.


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10 Comments leave one →
2009 October 12
David Annis permalink

I now realize that perhaps I should have titled this what’s the economic value… or what’s the net present value…
The real value is not economic; the real value is in not being ignorant.

2009 October 12
Andy Kaiser permalink

David, let me know if you want the title changed, and I’ll change it. It’s too late for the podcast, but I’m happy to modify the text.

Andy

2009 October 12
rc_moore permalink

David –
You seem to be discounting the fact that certain areas  knowledge can only be obtained (for the vast majority of us) in a university setting.  For many professions, little or no income can be earned without an accredited degree certifying some level of competency.
I guess you could argue that the cost of certification will not equal the earning capacity of the profession,  but it is not all about money,  it is often about the happiness of working in a field one loves,  not just in a field that generates the highest career profit, that drives the decision making process.
Can you explain , with a specific example,  why you feel that a career goal that requires advanced knowledge could be obtained without the education a university supplies?
I don’t see evidence in your essay that other practical options truly exist.
 
 
 

2009 October 13
Andy Kaiser permalink

In part a reponse to RC, in part a response to the article:

College and university education is great for specialized training, allowing students to delve deep in a particular topic.  But a lot of undergrads don’t need that!

I’ve actually been considering going back to college for a couple classes – training that would compliment my current job. But I also agree where the article talked about the needlessness of the overall college experience. In my case, I learned a lot, but very little of it applied to my eventual job (even though my degree and job are in the IT field). I probably would’ve been better off financially and received far more experience if I’d interned instead of going to college.

Andy

2009 October 13
Jacob Vohs permalink

I have a college degree. My son is working a two year technical degree in Industrial process control. He will Make more than me in a few years after graduation, and I have a good state job, and more money than most PhD grads. With regard to money 4 year degrees are over rated and stupidly expensive.

2009 October 14
rc_moore permalink

Andy, Jacob –
Have you considered that maybe  “you don’t know” what “you don’t know” and this gives you a false impression of the value of knowledge?
Since we are being anecdotal here;  I never appreciated the value of much that I had learned as an undergraduate until graduate school.
I would also suggest that most exist in a sort of “blindness” about the contributions of the highly educated, that allow most of to exist in a world where we can “pretend”  that knowledge is overrated.
I personally am very glad that a small group of our population makes the economic and lifestyle sacrifices necessary to maintain our civilization.
The way to resolve this argument is with objective evidence,  none of which has been presented.   Arguments against a historically productive system without it are naive and of little value.

2009 October 14
rc_moore permalink

It turns out the the U.S. Census has the answer to the question “what is the economic value of a college education”:
 
How Much Is a College Degree Worth?
How much is a bachelor’s degree worth? More than $25,000 a year, according to a March 2007 report from the U.S. Census Bureau. Adults aged 18 and older with a bachelor’s degree earned an average of $54,689 in 2005, while high school graduates earned $29,448. A two-year associate’s degree brings an average annual premium of $8,500 over a high school diploma.
 
From http://www.mdrc.org/area_fact_33.html.  I verified the source data from http://www.census.gov.

2009 October 14
Christopher permalink

It just depends on what you are going to college for. Go for what you love, not for what you think your going to make money doing. Not for some specific degree that like is said above, most likely will be applied minimally to the job you actually end up getting.
I am personally going to school for philosophy, and having access to other “thinking” individuals and the ability to argue/debate is very worthwhile. For other art related degrees, the access to other people, professors is the reason for going.
 
But yeah, if you are going for something specific, just go intern, would get you headfirst into the actuality of the job quicker.

2009 October 14
David Annis permalink

rc_moore, the article that you quote says that college graduates made more than $25,000 a year more than those without college degrees.  My point is that while I am confident that the number given is reasonably accurate I doubt that the entire difference is caused by the increased economic value that college adds to the output of those workers.  It is possible, for example, that smart people are more likely to graduate from college that dumb ones.  It is also possible that smart people would, on average, earn more than their less intelligent peers.  How much of the difference in earnings is attributable to the additional intelligence and how much is due to the college education?

Another example — perhaps people from rich families are more likely to graduate from college than poor ones.  Perhaps rich people are more likely to earn more because of family connections that help them get job interviews.  Perhaps the rich do better because they had better diets growing up; maybe they are more likely to land high paying jobs because they can afford nicer clothing for the interviews.  How much of the additional earnings of college graduates can be accounted for by the fact that those from poor families are under-represented in the pool of college graduates?

I am quite sure that the entire $25,000 difference in earnings is not because of the value that college adds to the output of its graduates.  What I object to is the assumption that the entire earnings increase is caused by the college education.

2009 October 15
rc_moore permalink

“What I object to is the assumption that the entire earnings increase is caused by the college education.”
You are right, we can’t assume that, and no such assumption has been made.   But we can’t assume the factors you list make any difference to the overall average either,  without data.
“It is possible, for example, that smart people are more likely to graduate from college that dumb ones”
This is likely to be true, but is it likely that a smart person, on average could make as much without the college education?  I think not.  So, the economic benefit of college remains.  And in fact,  it may be much greater than 25000 for the smart person.  Remember, the average may be pulled down by the mediocre person who gets a college education, but does not do much with it.
And a smart person who does not go to college would inflate the non-college income also (the assumption is that being smart, they maximize any endeavor),  so it may all even out.
“Another example — perhaps people from rich families are more likely to graduate from college than poor ones.  Perhaps rich people are more likely to earn more because of family connections that help them get job interviews.  Perhaps the rich do better because they had better diets growing up; maybe they are more likely to land high paying jobs because they can afford nicer clothing for the interviews…”
Again all this may be true.  But you are looking a very small percentage of the population, that will probably not greatly affect the average.   And presumably, the rich do well whether they go to college or not,  so their effect is found in the non-college data also.
And if you look at the data more closely,  the economic benefit of a college education really pays off for minorities, who presumably are not, on average, rich.
Your hypothesis really has no support, in either the data, or the casual analysis.   There is really nothing to suggest that on average,  a college education is anything but a major economic benefit.
 
 
 
 

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