The Benefits of Education-BECKER

An article by James Altucher, a columnist of the Financial Times, this past week essentially asserted that college and university education is a waste of time, that students would be better off by working rather than attending classes, or by using the money that went to tuition to travel instead. ("A mind is a terrible thing to waste but so is all the money that is being flushed down the toilet in the elitist quest for a good education. The best education is falling on the ground and getting a few scrapes. …Just don't get robbed for four straight years [by going to college]"). Two days later a columnist of the Wall Street Journal, David Wessel, argued just the opposite, that the benefits of higher education have never been higher, at least in the United States, and that the puzzle is why more Americans do not finish high school and college. Who is right? The evidence is overwhelming that Wessel is right about the benefits of education, and that Altucher does not know the subject he is writing about. It is well documented that the average earnings premium from a college education in the United States increased from about 40 percent in the late 1970's to about 80 percent at present. Not everyone does well financially from going to college, or badly by not going-Bill Gates is an obvious but extreme example of a college dropout- but the average person who does go has far better prospects for earnings, employment, and occupation than the average person who stops schooling after finishing high school. The economic benefits from completing high school also went up relative to those to high school dropouts, although they did not increase as much as the benefits from college. A similar picture holds for Great Britain and many other countries, although the changes elsewhere have been smaller than in the United States. Nor is this all. Research increasingly demonstrates that education improves performance in virtually every aspect of life. Educated persons on the whole are healthier, are better at investing in their children, have more stable marriages, smoke much less and in general have much better habits, commit many fewer violent crimes, are better at managing their financial resources, and at adjusting to unexpected shocks, such as hurricane Katrina. It might be thought that these correlations between education and various benefits, including earnings and health but not only these, are the result of abler persons, such as those with higher IQ's, and healthier persons getting more schooling rather than the effects of schooling. More able and healthy persons do have greater amounts of schooling, but literally hundreds of studies have tried to correct for these differences. They find that even after making these and other corrections, the effects of education on various monetary and non-monetary benefits remain very large. An additional finding is also important. Not only have the earnings benefits of education increased during the past 30 years, but so too have health benefits, the advantages of education in raising children, and the benefits of education in managing one's assets. The growing gains from education are pervasive and not limited to earnings, or to economic benefits narrowly conceived. This suggests that the forces producing the greater advantages are also broad and general rather than narrow and specific. Three such broad forces have been identified. Probably most important is that the technological progress of the past 30 years has increased the demand for educated and other skilled persons. Examples include the growth of the Internet and the personal computer, developments in biotech, innovations in financial instruments, and rapid progress in technologies that improve the health of adults. Globalization and the economic development of countries like India and China is a second factor that raised the returns to skill, for global growth increased the worldwide demand for products and services that use highly educated and other more skilled inputs. A third general force is due to the decline in the cost of plant, equipment, and other physical capital, in part the result of lower real interest rates. Educated and other skilled manpower is complementary with physical and financial capital, whereas low skilled labor is a substitute for such capital. Hence a cheapening of physical and financial capital would raise the demand for educated inputs relative to the demand for the less educated. Estimates indicate that in the United States the average rate of return on a college education in the form of higher earnings is about 10 percent. The average return is lower for students who fail to complete four years of college, and is higher for those who do graduate work. If the benefits of better health, better skills at raising children, better financial management, and so forth are added to the benefits of higher earnings, the total rate of return on college would rise to 15 percent or more. Should not such high returns have induced most persons who finish high school to go on for a college education, and encourage additional boys and girls to finish high school? Up to a point they have, so it all depends on whether one looks at the glass as half empty or half fill. Since earnings and other benefits of a college education began to increase almost 30 years ago, the fraction of high school graduates who go to college has also increased greatly, and the increase has been pervasive among different genders and racial groups. Higher enrollments are found for white males and females, African American males and females, and Hispanic males and females. Over 60 per cent of high school graduates now get some higher education, one of the highest percents in any country. True, many of these college entrants, especially men, fail to finish college, but at least they show awareness of the advantages of a college education. The real failure of the American education system compared to other countries is in the large numbers who drop out of high school. What is even worse from the perspective of equalizing opportunity is that the fraction dropping out of high school, some 20- 25 percent of high school students, is concentrated among African Americans and other minorities. Surprisingly, this fraction has not declined over time by very much, despite the huge increase in the returns from greater amounts of schooling. I do not have a good explanation for the lack of response in the high school graduation rate to the greater benefits of education, except that the American family started deteriorating rapidly only a little earlier than the returns to education began to rise rapidly. The reduced preparation for schooling, especially among boys in the many families without fathers, was offsetting the increased benefits from additional schooling. How to better prepare students so that more of them want to complete high school and attend college, and benefit from their schooling experience? It would be important to help stabilize African American and other families. In an earlier post (March 12 of this year) I discussed a subsidy to couples if they get and stay married. That might be an option, especially if the subsidy to marriage was greater to lower income couples, although I give various arguments in that post why such a subsidy may not be desirable. Perhaps head start school programs for children from broken families would be a better approach. Legalizing drugs would contribute, so that students would not drop out of high school drawn by the (slim) prospects of making a lot of money through the sale of drugs. The quality of public schools attended by most minority students is low-although teachers at these schools face formidable obstacles- so school vouchers and other ways to increase competition among schools for students would be helpful. T

Comments

[michael choe]

here is a graph i saw on greg mankiw's blog that shows the increasing returns of a college investment.

http://gregmankiw.blogspot.com/2007/04/college-premium.html

[ctw]

anyone aware of any data segmented into sub-categories defined by majors, GPA, other?

it strikes me that the cost-benefit trade for the "average college grad" isn't particularly useful for an individual facing the "college-no college" decision. eg, if one plans to major in a field with limited employment prospects and isn't much of a student, it seems plausible that the cost-benefit trade could be decidedly against a $100K "investment".

-charles

[pierre]

The expected return of college education might be very high but what about the level of risk of such an investment?
If one looks at education as an asset, then finance tells us that there is no free lunch: higher expected return means higher risk.
Not only is it hard for someone to evaluate how well she will do in college (otherwise, less people would drop out), but it is also notoriously difficult to predict what kind of skills will be demanded on the job market 5 years from now.
This might partially explain why people "under invest" in education.

Does anybody know of any data/empirical paper about the riskiness of investing in education?

thanks,

pierre

[Anon]

Here's a link to the Altucher column:

http://tinyurl.com/3xdsez

[Watches]

Correct but where is the money going to come from!

[Jake]

Prof. Becker opines:

"Research increasingly demonstrates that education improves performance in virtually every aspect of life. Educated persons on the whole are healthier, are better at investing in their children, have more stable marriages, smoke much less and in general have much better habits, commit many fewer violent crimes, are better at managing their financial resources, and at adjusting to unexpected shocks, such as hurricane Katrina."

I wonder about such research. Many folks across America exhibit the behavior that Prof. Becker cites without the benefit of higher education.

For example, the notion that educated people "have more stable marriages," in my limited experience, is simply laughable. I transitioned from blue collar work to so-called white collar work about 25 years ago, admittedly by attending and completing college. Of many old college friends and acquaintances, a tiny minority, at best, remain married today to the spouse they had back then.

I know, I know, it's just anecdotal evidence.

[MO]

I'm curious as to whether the returns on education differ for "elite" private university education vs. state university education. How does an individual's average lifetime return on a $60,000 investment in a 4yr degree from a state school compare to a $180,000 investment in a 4yr degree from a private school? (I'm getting old- my numbers could be too low.)

I imagine that for some students, the returns on a private school education are sub-optimal. In particular, it would seem that there are many "elite" students that opt-out of the workforce after investing in a pricey degree. Likewise, the value of an elite degree may be primarily in the networking and social connections, rather than the education itself.

I could be totally wrong here, but I speculate that the biggest gains to education accrue to state school students.

As an alumnus of both a large state university and a small private university, I noticed a striking difference in the makeup of the student bodies, in terms of economic demographics, family backgrounds, level of motivation, etc. Naturally, I wonder how the returns compare?

[N.E.Hatfield]

As for Altucher's article in the "F" Times, it has a lot too do with British humor and is most satirical. What I find most strange, is that the value of an education is now viewed in the most pedestrian and plebian vein. Such that pecuniary value is the most pressing concern, not the aspect of broadening ones mind or the honing of it so that it becomes sharp in handling critical and creative thinking and its application to problem solving. Which in the end, creates the pecuniary value in the first place.

As for the degrees granted, the B.S. (bull****), M.S. (more ****), and finally the Phd.(piled higher and deeper) speaks for itself. Or is this just a little more British humor?

[PB]

I find it deliciously ironic that Altucher is promoting part of the old Timothy Leary/Summer of Love agenda by means of economic arguments.

[ctw]

"... the value of an education is now viewed in the most pedestrian and plebian vein. Such that pecuniary value is the most pressing concern, not ..."

this totally predictable criticism is fair to neither the article, the post, nor to people seriously thinking about issues in education.

the article - as noted in the quoted comment - had an aura of tongue-in-cheek about it, and additionally it addressed exactly the aspects encompassed by my ellipses. mr altucher's essential argument (right or wrong) is that the time and money expended in acquiring the full benefits of a formal "elite" education may not produce results commensurate with those expenditures. there was no hint that he viewed an education as merely a meal ticket.

the post took up the quantifiable aspects and argued that they are enhanced by education. intangibles, being rather by definition unquantifiable, were appropriately not addressed.

OTOH, a legitimate complaint about both is that they inadequately address the pros and cons of formal vs informal education. while I can easily imagine an informal approach to "soft" subjects like philosophy, literature, etc (eg, a "great books" study group of the like-minded providing a forum for discussion), it's harder to imagine anything analogous for "hard" subjects like science and engineering with their requirements for expensive labs, relatively structured curricula, etc. so, as suggested in an earlier comment/query, it might be better to narrow the focus a bit before drawing any conclusions about the economic value of an education, in particular a formal one.

anecdotally, two of the more educated (in the broad sense) people I know personally have little or no college, and some of the least educated have multiple degrees. If one is really going to college to become educated as opposed to trained, it may well be the case that a formal program at a high cost institution is not worth much sacrifice. of course, if you have rich parents ...

-charles

[N.E.Hatfield]

ctw, Actually, your distinction of breaking education up into only two categories, "formal & informal" is sophmoric at best. Let's broaden a it a little bit as follows:

1. primary education
2. secondary education
3. post secondary education (academic,scholastic)
4. alternative education (Army, Navy, Marines, A.F., Timothy Leary, etc.)
5. self education (Abe Lincoln etc., etc.)

You need to lighten up a little bit. The seriousness you bring to the subject creates myriad stressors which affects the educational process and may be a cause as to why individuals don't pursue it. A little levity can go a long way in maintiang the interest of less than stellar students.

[ctw]

well, my two categories may be "sophmoric" [sic] but if so we're in the same grade. the topic under discussion is the "formal" process of "college and university education", so scratch 1 and 2. 4 doesn't make sense (the military services and timothy leary have exactly what in common?). that leaves 3 and 5 which I call "formal" and "informal" respectively.

and the concern indicated by the psycho-babble is irrelevant and unwarranted (I'm retired and very relaxed), but the thought is appreciated.

-c

[N.E.Hatfield]

Educational Psych. irrelevant? No wonder American education is having problems. As for the importance of 1 and 2, it's like building a structure without a solid foundation in the fundamentals. The above ground structure stands on shifting sands.

[N.E.Hatfield]

Just as an aside to educational theory, I wonder if Altucher is a major shareholder in any of the named Educational companies? He sounds an awful lot like a front man, ad man, marketing man, carnival barker, or what have you, for the stocks in such companies. ROI (return on investment)? Always a good thing to check out, but the intangibles never show up in the analysis. There is something to be said for "face time on the Quad." Even if it's just soaking up the rays and watching the pretty girls walk by. ;)

[Basil F]

Salutations Professor,

While I understand and agree with most of your arguements, I am at a bit of a standstill in regards to your point of school vouchers.

If vouchers increased competition amongst students in gaining attendance to certain schools, than wouldn't poorer students be at a further disadvantage in gaining admissions to those public schools? Was that not the problem meant to be solved in the first place?

Thank you ahead of time to whoever decides to shed light on the subject.

-Basil

[Josh Wexler]

I don't think Prof. Becker's response addresses Altucher's precise claim. Becker convincingly argues that the average of ALL college students fare better than the average of ALL non-attendees. I think a more charitable reading of the column would yield the following:

1)Altucher is asserting that finding alternative PRODUCTIVE uses for one's time and money is better than spending 4+ years and $200,000+ dollars on a university education.

2)Altucher is claiming that HE and THE READERS OF THE FINANCIAL TIMES would be better off finding alternative productive uses of their resources- ie, (presumably) highly intelligent people, mostly from wealthier, more educated, and more cultured families.

So, citing evidence that, on average, THE ENTIRE POPULATION of non-attendees fare worse does not address the more interesting point that Altucher is attempting to make. Most all of those people did not do what Altucher suggests: taking about $100,000 and using it for a couple years of traveling, and then working. I would love to see evidence that supports or counters this provocative view.

Furthermore, I'd like to see data on how much college does for students from poor families vs wealthy families. I'd guess that college is very important for the prospects of poor kids. I'd also guess that many rich kids could do without it and find a better life via The Altucher Way.

[N.E.Hatfield]

Josh, The Times article is a "sales blurb". It should be read, "Post-secondary education really doesn't have the ROI. So forget your kids, your responsibilites to them or yourself and invest your money in Education stocks; the p/e, p/s ratios are superb. Buy now before the boom takes off!"

As for the educational value of travel, I was once told, "Join the Navy and see the world!" Through a port hole, if your lucky enough to get near one. ;)

[Ted Sternberg]

Becker writes:

"Not only have the earnings benefits of education increased during the past 30 years, but so too have health benefits, the advantages of education in raising children, and the benefits of education in managing one's assets."

This makes it clear that despite the best econometric efforts, cause and effect here have yet to be disentangled.

[Adam]

Sure, you could skip college, but why on earth would anyone want to? It was the best four-years of my life.

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