Economics, Pethokoukis

How much does college really help your earnings?

The New York Times

The New York Times

College grads make nearly twice as much, on average, than folks who aren’t. That’s a record high. And over the long-run, a college degree is worth $500,000 more than a high school degree. That’s double what it was three decades ago, adjusting for inflation. Those two data points, from a New York Times article by David Leonhardt, supply an apparently easy answer to the question, “Is college still worth it?”

But deeply evaluating the value of a college degree isn’t quite so straight forward. AEI’s Andrew Kelly:

Any answer to the basic question—whether going to college is worth it—must reflect the probability of completing. College is likely still “worth it,” even after accounting for the risk of not completing, but the payoff cannot be as large as it is when we look only at graduates.

It’s akin to saying that betting the trifecta at the Preakness was worth it because I won. Forget all the people who bet but didn’t win. If I were interested in the expected value of betting the Preakness, I’d want to know the payoffs weighted by probability of winning.

Indeed, as 529′s Ben Casselman notes, fewer than 60% of full-time students who are enrolled in college for the first time graduate within six years. What’s more, the gap between those with a bachelor’s degree or higher than those with “a two-year degree/some college” is expanding. At the same time, the gap between the “some college” folks and those with only a high school degree is narrowing:


And, of course, people who have been successful academically in high school are more likely to go to college. So does the pay gap reflect the value of college–whether as a signalling mechanism or mechanism for improving human capital–or merely reflect the kind of people who self select for college? Here is a bit from economist Bryan Caplan on a recent EconTalk podcast:

So the average college graduate is probably going to be smarter; he’s probably going to be harder-working. He’s probably going to be more conformist, less impulsive, have many other advantages. And that 83% [pay gap] is capturing all the advantages that the college graduate has. Not just the single advantage of the education. It’s capturing the benefits of a lot of advantages he had before he ever started school.

So if you really want to find out how much did the education raise his earnings, you need to correct for or adjust for all these initial advantages.  … So, basically just putting in, just correcting for your measured IQ before you start college, that will usually bring the payoff down by about 30%. …

So, in my book, after going over all of the evidence that I could find and just weighing it all, I say, well, my best guess is that only about 55% of the gain that you seem to get is genuine. And the rest is what college graduates, the extra amount college graduates would have actually earned if they hadn’t even gone to college.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

3 thoughts on “How much does college really help your earnings?

  1. There’s way too much aggregation in those median numbers. They tell you nothing about what students actually took in college, what kind of degrees they earned (or didn’t earn), or whether (much less how much) those courses and/or degrees contributed to their eventual jobs. There’s a lot of income space between a hedge funder/CEO, or even an engineer/MD/JD and a Grievance Studies barrista.

  2. Fantastic article explaining why the cursory analysis can be highly misleading. What economist Bryan Caplan is talking about is referred to as a “selection bias”.

    An example that more people will understand is that if you measured college athletes physical abilities version non-college athletes, the college athletes would be superior. Assigning all the difference to the fact that they participated in college athletics would be highly misleading because they participated in college sports but rather they were ALREADY good athletes.

    This is what college promoters do. They assign all the differences between high school and college grads to university attendance but surely the college bound were already top of their class.

  3. The “probability” of completing is connected to the payoff. The problem is we’re making people pay too much to go to college. That’s why college is getting less “worth it” even for those who do complete, and it’s also why students drop out of college: they have financial trouble.

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