Ch. 9. Investments in Human Capital: Education and Training What are the costs and benefits of obtaining a college degree? What factors affect the number of people attending college? Why do men and women pursue different types of college degrees? Why has the return to a college degree increased over time?

The “Returns” to Education Joint Economic Committee Report to Congress (2000) Rate of return on an additional year of schooling is quite substantial. In 1990, this rate averaged almost 10 percent per annum. In 1998, the median income of bachelor degree recipients was $46,285, nearly $20,000 higher than the median income for workers with only high school diplomas. Increased educational attainment increases the probability that an individual will remain in the labor force. –Among male workers in their 30’s, 2.4 percent of college graduates were out of the labor force, 7.9 percent for high school graduates.

The “Returns” to Education Joint Economic Committee Report to Congress (2000) Education and training associated with fewer involuntary job changes. Positive relationship between increased education and good health.

The “Returns” to Education “Public” Returns –Human capital formation has a positive effect on economic growth. If education levels had stagnated at 1959 levels, and everything else had remained the same, GDP in 1997 would be 82.6 percent of its current level in real terms. –More education is associated with reduced dependence on income transfers. –Where the population is better educated there are, on average, fewer crimes.

Salaries by major from WSJ study Salaries by major from FSBWSJ studyFSB

MODEL OF COLLEGE ATTENDANCE. If PV(Benefits) > PV(costs) ==> attend college. Benefits: –increase in earnings –utility from different type of work. Costs –direct costs (tuition, books, etc.) –foregone earnings

Estimating the return to education Suppose a person may attend college from ages C t =earnings at age t with college degree H t =earnings at age t with high school degree D t =C t -H t Retirement at age R T = annual tuition, fees. PV(Costs) = ( H 19 + T) + (H 20 +T)/(1+r) + (H 21 +T)/(1+r) 2 + (H 22 +T)/(1+r) 3 PV(Benefits) = D 23 /(1+r) 4 + …… D R /(1+r) (R-19) NPV = PV(Benefits) – PV(Costs)

Estimating the return to education Why does NPV curve slope down? If discount rate 0  education is a “good” investment.

Factors influencing rate of return wage premium for college graduates direct costs of attending college –Tuition –scholarships/financial aid foregone earnings –state of the economy Individual preferences/abilities: –discount rates –Ability –preferences regarding types of work.

Factors influencing rate of return Age Expected period of time in labor force: –Women, childbearing, and career interruptions. –Rising life expectancy Taxation –Progressivity matters

Source: Despite widespread claims that a college degree is no longer worth the rising price of tuition, a bachelor’s degree still has about the same return on investment today as it did in the 80s. College still pays for itself, and then some; it will earn you, on average, a 16 percent return, which is a higher rate of return than on investments in the stock market (6.8 percent), corporate bonds (2.9 percent), gold (2.3 percent), long-term government bonds (2.2 percent), or housing (0.4 percent).

Source:

Difficulties with measuring rate of return Upward bias –higher ability may be more likely to go to college. Downward bias –most studies exclude value of benefits which tend to rise with education. Uncertain bias –most studies exclude “nonpecuniary” differences in jobs Risk, physical demands, etc. Dealing with the bias –Statistical methods –Twins studies

Recent research on returns to education Published in Economics of Education Review 27, 2008:

Recent research on returns to education Published in Journal of Urban Economics 61, 2007:

Recent research on returns to education Published in Journal of Population Economics 23, 2010:

Factors determining degree choice Male-Female Differences in College Degree Choices

Explanations for gender differences –Employer discrimination –Employee tastes –Penalties for career interruptions –Sex differences Classroom structure

Rising Returns to Education

…unlike the 1990s, when companies needed hundreds of thousands of skilled workers to develop, build and install high-tech systems—everything from corporate intranets to manufacturing robots—demand for such skills has fallen in recent years, even as young people continued to flock to programs that taught them. Source: WSJ.

Rising Returns to Education Returns increased in 1990s, flattened in 2000s institutions minimum wage unions increases in international trade skill biased technological change transition to service growth of computing NOT changes in relative supplies of college and high school graduates