Tuesday, May 27, 2014

The college earnings premium

Dean Baker suggests that the evidence of a huge average earnings premium associated with a college education does not provide unambiguous support for the idea that most everyone should stay in school. For men in particular, he notes, the earnings of college graduates exhibit a high dispersion around the mean, so that "near one in five recent male college grads earned less than the average high school grad." For these individuals, he infers, college may not pay.

This claim rests, of course, on an implicit counterfactual—namely, that these men in the lower tail of the college pay distribution would have been able to earn near the mean of the high-school distribution if they had not gone to college, and therefore that they did not gain from having graduated college. This assumption is quite likely incorrect. Even within occupations considered low-skilled, there is a college premium. And even if some percentage of men did not gain economically by graduating college, we can only judge that college was a bad decision for them ex post; this did not make going to college a bad decision ex ante, when an individual is unlikely to know whether they will be among the unlucky losers in the earnings lottery.

There is abundant evidence that a college degree pays off for otherwise identical individuals. I am unaware of evidence suggesting that these gains do not apply to folks in the lower tail of the earnings distribution. This post by Dylan Matthews provides a nice summary in layperson's terms of the studies showing that the return to college is not simply a spurious correlation based on differences between college-goers and non-college-goers in terms of family background or intelligence; rather, a wide range of studies provide convincing evidence that the return to college is causal, in the sense that a given person can expect to earn substantially more with a college degree than they would without one.

Count me among the people who get pissed off when I read people saying that college doesn't pay. College is expensive and not a certain bet, but it is a very sound investment even from a purely financial point of view. And those of us in the college business also like to think that college has a sizable non-pecuniary payoff. I'm with Autor:
“Sending more young Americans to college is not a panacea,” says David Autor, an M.I.T. economist who studies the labor market. “Not sending them to college would be a disaster.”

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