[Paleopsych] The Economists' Voice: Does College Still Pay
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
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
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:
* Data Show Value of College Degree (4/8/2005)
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 bachelors 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 Clintons 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 bachelors
degree; and those who earned at least a bachelors degree. Through themid-1990s
average hourly wages increase fairly steadily among those with at leasta
bachelors 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 workers 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
 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
bachelors 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 bachelors 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
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
inequality at both the bottom (where it should be) and the top (where it
shouldntbe, 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 bachelors 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 bachelors 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
1980s: 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
thebachelors 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