[Paleopsych] Lisa Barrow and Cecilia Elena Rouse: Does College Still Pay?
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Lisa Barrow and Cecilia Elena Rouse: Does College Still Pay?
The Economists' Voice
Volume 2, Issue 4 2005 Article 3
Tuesday, December 06, 2005
[This is an absolutely bad paper, unfortunately all-too-typical of what
educational "economists" foist upon the public. Buried in footnote 3 is a
statement that that the resulting income is not going to be correct for the
sort of students that go to college in the first place. That those who do go
to college just might possibly have higher intelligence than those who do
not is not even mentioned!
[Further bad economics is the statement that "Minimum wage increases in the
late 1990s helped increase the wages ofthe lowest-skilled workers...." But
what about those that don't get jobs because the minimum wage is set at more
than they can get on the market??
[I shouldn't even quibble at this point with setting the discount rate at
five percent, though the true time-discount rate is more on the order of two
Lisa Barrow is an economist at the Federal Reserve Bank of Chicago and
Cecilia Rouse is a professor at Princeton.
Since the mid-1990s college tuition costs have risen quickly while the rate
of increase in the value of education has slowed considerably. Cecilia Rouse
and Lisa Barrow explore the reasons and ask if college remains a good
In the 1980s the value of a college education grew significantly. According
to Census data, in 1979 those with a bachelor's degree or higherearned
roughly 45 percent more per hour than workers with only a high school
diploma. By 1989 wages for college graduates were more than 70 percent
higherthan those of high school graduates.1 This dramatic change revived
argumentsover the cause and effect relationship between education and higher
income. Inother words, was education driving income levels or was the
education trend abyproduct of rising income levels? This debate spawned a
very large literature tying increasing income inequality to a decrease in
demand for workers withoutmarketable skills. A key reason for the increasing
value of a college educationwas the increasing cost of not having one: Real
earnings of workers without somecollege education fell during the 1980s, as
earnings of the more highly educatedincreased. Politicians and policymakers
tried to enact policies to improve educational attainment, for as President
Clinton stated: "Today, more than everbefore in our history, education is
the fault line between those who will prosper inthe new economy and those
who will not."2
1 All levels of education have become more valuable since the late 1970s.
The return on each yearof schooling was 6.6 percent (in terms of hourly
wages) in 1979, compared with 9.8 percent in 1989 and 10.9 percent in 2000.
We focus on college education here due to space limitations.
2 "President Clinton's Call to Action for American Education in the 21st
Century" (February 1997) available at
www.ed.gov/updates/PresEDPlan/part9.html, accessed on April 4, 2005.
But the labor market changed in the mid-1990s. The hourly wage gapbetween
those with college education and those without, which had grown by 25
percentage points in the 1980s, grew by only 10 percentage points in the
1990s. At the same time, college tuition rates increased extremely rapidly.
The wage-gapslowdown has led some to wonder: Has college ceased being the
better deal overthe past few years? Do rising tuition levels mean that the
value of a collegeeducation has peaked? And even, is attending college still
worth the costs?
Our answer to the final question is yes. College is definitely still worth
theinvestment. In fact, there are no signs that the value of a college
education haspeaked or is on a downward trend. Also, the rapid annual
percentage rise in thecost of tuition has had little effect on the value of
a college education, largelybecause tuition is a relatively small part of
the true total economic cost of attending college. Most of the true economic
cost of college is the wages studentsforego while they attend--and those
have not risen by very much at all.
The Changing Value of Education
To make sense of trends in the economic value of education, one must first
understand what economists see as the "return to education." The return to
education is the capitalized present value of the extra income an individual
wouldearn with additional schooling, after taking into account all of the
costs of obtaining the additional schooling.3 This return to education may
change becauseof a shift in the income for individuals who obtain more
schooling or a shift in theincome of those who do not. Also, a change in the
economic costs of educationcan affect the return to education.
3 Ideally, one would observe a worker's income were she to obtain the
additional schooling, andthen compare this to her income were she to obtain
no further schooling. Because an individual either obtains more schooling or
does not, this ideal is impossible to measure. Therefore, economists
typically compute the return to schooling by comparing the average income of
workerswho have obtained the additional schooling to those who did not. The
main conceptual issue with this observed return to schooling is a concern
that workers who obtained the additional schoolingmay also differ from those
that did not along unobserved dimensions (such as they were moremotivated or
hard working). Further discussion of these issues is beyond the scope of
this paper; however, we refer the interested reader to Card (1999).
Figure 1 shows the average hourly real wages (relative to hourly wages in
1980) for four sets of workers between 1980 and 2004. The four
categoriesinclude: those who did not complete high school; those who only
earned a high school diploma; those who have some college education but did
not earn a bachelor's degree; and those who earned at least a bachelor's
degree. Through themid-1990s average hourly wages increase fairly steadily
among those with at leasta bachelor's degree, while the real wages of high
school dropouts and of thosewith only a high school diploma decline. These
trends account for the largeincreases in the return to schooling through the
Since the mid-1990s the average wages of college graduates have skyrocketed,
increasing by 18 percent by 2004. However, the wages of highschool dropouts
have also risen, climbing by 10 percent in the second half of the1990s from
their lowest levels in 1994. Because of this turnaround in the wagesof high
school dropouts, the college wage premium has risen at a much slowerrate of
increase than before. And rapidly rising tuition costs must be set
againstthis slower rate of increase.
[Figure 1 Hourly Wages by Education Group Relative to 1980 Hourly Wages
Source: Authors' calculations from the 1980-2004 (even years only) Current
Population SurveyOutgoing Rotation Group files available from Unicon. We
limit the sample to individualsbetween ages of 25 and 65 years, and drop
observations with wages < 1/2 of the minimum wage orabove the 99th
percentile of the distribution.]
Why Is the Premium No Longer Rising as Rapidly?
Many economists in the 1990s thought the major source of increasing wage
inequality was "skill-biased technological change" (see Bound and Johnson
 and Katz and Murphy ). Changes in technology increased
theproductivity of high-skilled workers relative to low-skilled workers,
raising therelative demand for the former. Therefore, relative wages for
high-skilled workersrose, while those for the less-skilled declined. An end
to this skill bias in technological change could account for the leveling
off of the return to education.
While possible, we do not believe this is a likely explanation. The
relativewages of college graduates have risen at the same time as the supply
of high- skilled workers has increased, due to higher enrollment at colleges
and greaterimmigration of high-skilled workers. Between 1996 and 2000
college enrollmentrose by nearly 7 percent (National Center for Education
Statistics, 2003). Since1999, 36 percent of immigrants entering the U.S. had
at least a bachelor's degreecompared with 24 percent of immigrants arriving
in the 1980s (CurrentPopulation Survey, 2003). The share of the population
aged 25 to 65 years old with at least a bachelor's degree rose from 26
percent in 1996 to 30 percent in 2004.4. Despite the growth in the relative
supply of college graduates, the wages of college graduates have continued
to rise dramatically, which indicates an increasing--not a
decreasing--demand for their skills. Moreover, average wagesof workers with
lower levels of education have also increased since 1995; it is this
turnaround in the trend which accounts for the slowing growth in the return
4 Authors' calculations based on March CPS data. Autor, Katz, and Kearney
(2004) also find thatthe relative supply of college-equivalent labor
continued to increase throughout the late 1990s andearly 2000s.
Thus the relevant question is: Why have the wages of these lower-skilled
workers increased in the past decade?
Minimum wage increases in the late 1990s helped increase the wages ofthe
lowest-skilled workers, but it is unlikely to account fully for the
turnaround. First, the last increase in the federal minimum wage came in
late 1997, two yearsafter average wages of the lowest-skilled workers began
to increase. It cannot account for subsequent increases in the wages of
low-skilled workers. The statesthat have raised their minimum wages since
1997 make up only about one-third of U.S. payroll employment: It is unlikely
that state minimum wages can fullyaccount for changes in average wages
across the entire country.5 Moreover, there is an anomaly in the time-series
relationship between minimum wages and inequality: In the data, the level of
the minimum wage is correlated with inequality at both the bottom (where it
should be) and the top (where it shouldn'tbe, if a low minimum wage is a
cause and not a consequence of high inequality) of the wage distribution.6
The booming economy of the late 1990s is the most likely explanation for the
turnaround, as it raised the average wages of all workers, including those
with the lowest skills.7
5 States that raised their minimum wages include Alaska, California,
Connecticut, Delaware, Hawaii, Illinois, Massachusetts, Maine, New York,
Oregon, Rhode Island, Vermont, and Washington. The District of Columbia also
raised its minimum wage.
6 Lee (1999) finds that in the 1980s the fall in the real value of the
minimum wage can account forincreasing inequality at the bottom of the wage
distribution, suggesting that minimum wageincreases of the mid-1990s also
propped up wages at the bottom of the wage distribution, althoughAutor,
Katz, and Kearney (2004) raise some caution about this interpretation.
Namely, theyhighlight that much of the decline in the real value of the
minimum wage during the 1980soccurred during an economic downturn, whereas
the minimum wage increases in the 1990s were legislated during economic
7 Studies of labor market cyclicality, e.g., Hoynes (2000) and Hines,
Hoynes, and Krueger (2001), show that earnings and (especially) employment
are procyclical and that less educated individualsexperience greater
cyclical variation than more educated individuals.
Why College Education Is Still Worth It
How good an investment finishing college is depends on both earningsand
costs--the earnings of college graduates relative to high school graduates
andthe costs of attending college (both tuition and foregone earnings).
Tuition andfees for a four-year college for the 2003-2004 academic year
averaged $7,091; the average net price--tuition and fees net of grants--was
$5,558 (both amountsin 2003 dollars).8 If we assume that tuition and fees
continue to rise as they didbetween the 1999-2000 and 2003-2004 school
years, and conservatively look atsticker rather than net prices, the average
full-time student entering a program inthe fall of 2003 who completes a
bachelor's degree in four years will pay $30,325 in tuition and fees. If we
assume an opportunity cost equal to the average annualearnings of a high
school graduate (from the March 2004 Current PopulationSurvey) and a 5
percent discount rate for time preference, the total cost of attending
college rises to $107,277. In other words, college is worthwhile for an
average student if getting a bachelor's degree boosts the present value of
herlifetime earnings by at least $107,277.
8 U.S. Department of Education, 2005, based on data from the National
Postsecondary StudentAid Study.
What is the boost to the present value of wages? At a 5 percent
annualdiscount rate, it is $402,959. The net present value of a four-year
degree to anaverage student entering college in the fall of 2003 is roughly
$295,682--the difference between $402,959 in earnings and $107,277 in total
costs.9 A student entering college today can expect to recoup her investment
within 10 years ofgraduation.
9 Assuming that the college graduate-high school graduate earnings gap is
constant over thelifecycle and equals the difference in average annual
earnings for these two education groups asmeasured in the 2004 March Current
Population Survey, a college graduate earns $27,800 more in inflation
adjusted dollars per year. Alternatively, if we assume annual earnings will
follow averageearnings by age, the net present value to a first year student
in the fall of 2003 is roughly $246,923 ($354,200 in earnings minus $107,277
in tuition, fees, and lost wages). Note that by using annualearnings we take
into account the higher rates of unemployment among high school graduates.
This may not be correct, to the extent that lower unemployment is not the
result of completing thebachelor's degree; rather, it may be result of
having the personal factors that made it likely that anindividual would
complete the degree in the first place.
It still pays to go to college--very much so, at least as much as ever
10 Note, however, that future changes in the U.S. labor market might affect
relative compensation. If many more people who otherwise would not have
attended college decide to do so, a dramatically increased supply of college
graduates would compete in the labor market, and hence, the net benefits of
college might be significantly smaller than we calculate.
Letters commenting on this piece or others may be submitted at
References and Further Reading
Autor, David H., Lawrence F. Katz, and Melissa S. Kearney. 2004. "Trends in
U.S. Wage Inequality: Re-Assessing the Revisionists," Unpublished
manuscript. Bound, John and George Johnson. 1992. "Changes in the Structure
of Wages in the 1980's: An Evaluation of Alternative Explanations," The
American EconomicReview, 82(3), pp. 371-392.
Card, David. 1999. "The Causal Effect of Education on Earnings" in Handbook
of Labor Economics, Vol. 3A (Orley C. Ashenfelter and David Card, editors).
(Amsterdam: Elsevier), pp. 1801-1863.
Current Population Survey. 2003. "Table 2.5: Educational Attainment of the
Foreign-Born Population 25 Years and Over by Sex and Year of Entry: 2003,"
The Foreign-Born Population in the United States: March 2003. (P20-539).
April 1, 2005.
Hines Jr., James R., Hilary W. Hoynes, and Alan B. Krueger. 2001. "Another
Look at Whether a Rising Tide Lifts All Boats," in The Roaring Nineties:
CanFull Employment Be Sustained? (Alan B. Krueger and Robert M. Solow,
editors) (New York: The Russell Sage Foundation), pp. 493-537.
Hoynes, Hilary W. 2000. "The Employment and Earnings of Less Skilled Workers
Over the Business Cycle," in Finding Jobs: Work and Welfare Reform. (Rebecca
Blank and David Card, editors) (New York: The Russell Sage Foundation), pp.
Katz, Lawrence F. and Kevin M. Murphy. 1992. "Changes in Relative Wages,
1963-1987: Supply and Demand Factors," The Quarterly Journal of Economics,
107(1) (February), pp. 35-78.
Lee, David S. 1999. "Wage Inequality in the United States During the 1980s:
Rising Dispersion or Falling Minimum Wage?" The Quarterly Journal of
Economics, 114(3) (August), pp. 977-1023.
Pierce, Brooks. 2001. "Compensation Inequality," The Quarterly Journal of
Economics, 116(4) (November), pp. 1493-1525.
Snyder, T. D., A.G. Tan, and C. M. Hoffman. 2004. "Table 174. Total fall
enrollment in degree-granting institutions, by attendance status, sex of
student, and control of institution: 1947 to 2001," Digest of Education
Statistics, 2003. (NCES-2005-025). U.S. Department of Education, National
Center for Education Statistics. Washington, D.C.: Government Printing
Office. Retrieved from
http://www.nces.ed.gov/programs/digest/d03/tables/xls/tab174.xls on April 1,
U.S. Department of Education, National Center for Education Statistics.
2005. National Postsecondary Student Aid Study: Undergraduate Online Data
AnalysisSystem. Produced by The Berkeley Electronic Press, 2005
We thank Gadi Barlevy, Jonas Fisher, and Alan Krueger for useful
conversations, and Kyung-Hong Park for expert research assistance. All
errors in fact or interpretation are ours. The opinions in this paper do not
reflect those ofthe Federal Reserve Bank of Chicago or the Federal Reserve
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