From ‘Liberty Street Economics’ (whatever that means, given that it is a site within NY Fed) –
In our recent Current Issues article and blog post on the value of a college degree, we showed that the economic benefits of a bachelor’s degree still far outweigh the costs. However, this does not mean that college is a good investment for everyone. Our work, like the work of many others who come to a similar conclusion, is based in large part on the empirical observation that the average wages of college graduates are significantly higher than the average wages of those with only a high school diploma. However, not all college students come from Lake Wobegon, where “all of the children are above average.” In this post, we show that a good number of college graduates earn wages that are not materially different from those of the typical worker with just a high school diploma. This suggests that, at least from an economic perspective, college may not pay off for a significant number of people.
The chart below plots the median annual wage for full-time employed workers with a bachelor’s degree between 1970 and 2013, together with the median annual wage for those with only a high school diploma. We also plot the annual wage for the 25th percentile of college graduates. All figures are expressed in constant 2013 dollars.
Annual-Wage-by-Education-1970-2013
The much discussed college wage premium is quite clear, as the median worker with a bachelor’s degree earns well above the median worker with only a high school diploma, a trend that has held throughout the past four decades. Measured at the medians, the wage premium for a bachelor’s degree has generally hovered between 60 and 70 percent since the 1990s. As we have cautioned before, this earnings gap may arise at least in part from differences in the skills and abilities of those who earn a college degree compared with those who don’t, rather than from the knowledge and skills acquired while in college.
However, when we look at wages for the 25th percentile of college graduates, the picture is not quite so rosy. In fact, there is almost no difference in the wages for this percentile ranking of college graduates and the median wage for high school graduates throughout the entire period. This means that the wages for a sizable share of college graduates below the 25th percentile are actually less than the wages earned by a typical worker with a high school diploma. While we can’t be sure that the wages of this group wouldn’t have been lower if they had never gone to college, this pattern strongly suggests that the economic benefit of a college education is relatively small for at least a quarter of those graduating with a bachelor’s degree.
When we look at men and women separately, the same basic wage pattern holds, although a wider gap opens up among men. The 25th percentile for male college graduates has been about $4,000 to $5,000 more than the median male high school graduate in recent years, whereas among women, the gap has recently been around $2,000. This difference between genders suggests that some people may be choosing lower paying jobs because of occupational preferences or family considerations.
Overall, these figures suggest that perhaps a quarter of those who earn a bachelor’s degree pay the costs to attend school but reap little, if any, economic benefit. In fact, once the costs of attending college are considered, it is likely that earning a bachelor’s degree would not have been a good investment for many in the lowest 25 percent of college graduate wage earners. So while a college degree appears to be a good investment on average, it may not pay off for everyone.
So what is the solution? Well, 25% of all students should simply not go to college then, right? Well, no. Because then the 25% of the 75% that are left will once again underperform all “other” college students when it comes to wages. So say another 25% of the 75% decided to get out of college instead of drowning in debt which can never be repaid. Well, great, until the 25% of the leftover college students once again is left holding the short stick. And so on, and so on, until by the induction of Xeno’s paradox there is just one college student left. And what happens then: how will all those millions of Keynesian professors maintain their tenure and their shaman status paying well into the 6 figures?
In fact, let’s just forget the NY Fed said anything, and continue enslaving future generations with debt that will never be repaid. Because after all, the Krugmanites of the world gotta get paid.
