[Paleopsych] Lisa Barrow and Cecilia Elena Rouse: Does College Still Pay?

[Premise Checker]

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 
percent.]

Lisa Barrow is an economist at the Federal Reserve Bank of Chicago and 
Cecilia Rouse is a professor at Princeton.

Summary

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 
investment.

------------

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 
mid-1990s.

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 
[1992] and Katz and Murphy [1992]). 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 
to schooling.

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 
expansions.

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 
before.10

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 
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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). 
Retrieved from 
http://www.census.gov/population/socdemo/foreign/ppl174/tab02-05.xls on 
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. 
23-71.

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, 
2005.

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

Acknowledgements:

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 
System.