[Paleopsych] The Economists' Voice: Does College Still Pay

Premise Checker checker at panix.com
Fri Oct 7 23:34:37 UTC 2005

Does College Still Pay?
The Economists' Voice
Volume 2, Issue 4 2005 Article 3

Lisa Barrow and Elena Rouse
Federal Reserve Bank of Chicago
Princeton University

First, the summary from the "Magazine and Journal Reader" feature of the daily 
bulletin from the Chronicle of Higher Education, 5.10.3

    A glance at the current issue of The Economist's Voice: The value of a
    college degree

    The hourly-wage gap between people with college degrees and those with
    only a high-school education has been growing for decades, but the
    rate of increase slowed in the 1990s. At the same time, tuition prices
    rose, leading people to ask whether college was still worth it. But
    after studying the financial risks and rewards of higher education,
    two economists have concluded that continuing one's education
    definitely still pays off.

    "In fact, there are no signs that the value of a college education has
    peaked or is on a downward trend," say Lisa Barrow, an economist at
    the Federal Reserve Bank of Chicago, and Cecilia Elena Rouse, a
    professor of economics at Princeton University.

    For the average student who entered college in 2003, the authors
    calculate, the cost of earning a bachelor's degree would be worthwhile
    if it raised the value of the student's lifetime earnings by $107,277.
    That figure represents the sum of average tuition and fees for a
    four-year degree program and the amount someone with just a
    high-school diploma could earn in the same span of time.

    Ms. Rouse and Ms. Barrow write that a college diploma would raise such
    a student's lifetime earnings by as much as $402,959 -- nearly
    $300,000 more than the total cost.

    That increase is important to focus on, in contrast to the rising cost
    of tuition, which the authors say has almost no effect on the value of
    a college education. In fact, despite the growth in the number of
    graduates, the wages of degree-holders continue to rise, indicating
    "an increasing -- not a decreasing -- demand for their skills," they

    The article, "Does College Still Pay?," is available at

    --Jason M. Breslow

    Background article from The Chronicle:
      * [55]Data Show Value of College Degree (4/8/2005)


   54. http://www.bepress.com/ev/vol2/iss4/art3/
   55. http://chronicle.com/weekly/v51/i31/31a02203.htm



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 schooldiploma. By 1989 
wages for college graduates were more than 70 percent higherthan those of high 
school graduates.1 This dramatic change revived arguments over 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

But the labor market changed in the mid-1990s. The hourly wage gapbetween those 
with college education and those without, which had grown by 25percentage 
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 

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 students forego while they attend--and those have not 
risen by very much at all.

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.

"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.

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.

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.

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 Hourly Wages by Education Group Relative to 1980 Hourly Wages

Source: Authors’ calculations from the 1980-2004 (even years only) Current 
Population Survey Outgoing 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 

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.

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 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 and early 2000s.

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.

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

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.

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

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.

8 U.S. Department of Education, 2005, based on data from the National 
Postsecondary StudentAid Study.

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 

It still pays to go to college--very much so, at least as much as ever 

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

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.

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 

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.

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. 

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 


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.

More information about the paleopsych mailing list