Sunday, May 19, 2013

Breaking down the higher ed wage premium

The wage premium for higher education is high and growing. This is well known. Perhaps less appreciated though is that the average premium can vary greatly by college major and by whether or not the person gets an advanced degree.

Luckily for us, there is a very nice piece from the Cleveland Fed on these questions.

Here's a graph from the paper of the overall premium (clic the pic for an even more educational image):

Median wages for BA/BS and higher have gone from 140% of high school only wages to 180% of high school only wages from 1977 to 2010. Note that the premium for "some college" has stayed fairly flat over the same time period.

So, "go to college, young person", right? Well there is the big issue of whether higher education creates human capital or just serves as a signal of innate ability (phone call for Robin Hanson).

And there's also the issues of "what major" and "what degree".

Here's another graph from that Cleveland Fed piece (clic the pic for an even more self-serving image):

English majors get a wage premium of a bit below 1.5 and if they get an advanced degree, it's around 1.75.  Economics majors get a wage premium of a bit below 2 and if they get an advanced degree, it's around 3.00

Yet the thickness of the bars tells us that there are more english majors than economics majors (of course this could have something to do with labor demand, but I somehow doubt it)!

Electrical engineering is the most remunerative major with an average premium of 2.5. Elementary Education is the least with a average premium well below 1.3.

In sum, a BA/BS is not a guarantee of an 80% wage premium. Not all majors may be "worth it" economically, given the accounting costs and opportunity costs of getting the degree.  

Trying to get a degree and failing can also be costly if multiple years are burned up in the attempt. Dropping out without a degree after 5 years of going to college is on average, an economic disaster.

So, "get a degree in the most remunerative major that you can get through, subject to the constraint that you can do it quickly and cheaply enough to make it worthwhile".

Note that these graphs are equally consistent with both the signaling and capital formation views of higher ed.


robert said...

Figure 5 is one of the most informative charts I've ever read; I've always wanted to incorporate the width of the bars with additional information. Bravo Cleveland Fed.

Anonymous said...

Is there a reason you left out figure 4?

Angus said...

@ anon 8:28: I liked 5 better?

John Covil said...

As a policy matter, I always marvel how so many think we can turn marginal students into average students. Yes, there are factors other than aptitude that explain the likeliness of going (and finishing!) college, but it should be scandalous how we cajole folks on the margin of attending college to take on mountains of debt on the promise of some average wage premium a Bachelor's degree confers.

JWO said...

I wonder if you could get some evidence to separate the signal from the human capital by looking at engineering grads who never get an engineering job with non engineering grads who get jobs as engineers.

Anonymous said...

Fig 5 is good, but not quite there; valuable enough to be worth the editing
the two things that jump out at me are that the lines connecting the majors to the bars are hard to follow - some spacing there would be good.
also, the use of height to represent % doesn't seem like the best way to do this; I would politely suggest a nubmer at the end of the bar

Jon P said...

It is the thickness of the bars, not the length, I fear that determines whether or not a returning student will be able to find the major in an evenings/weekends program.

Or perhaps the thickness is a result of what is being offered?