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Education Pays, But Perhaps Less Than You Thought

If you Google the phrase “education pays,” the very first hit you’ll get is a page at the Bureau of Labor Statistics that features a chart representing the median weekly earnings in 2007 of people with various levels of education. The higher the level of education, the higher the income. For example, high school graduates earned $604 per week, compared to $987 for those with a bachelor’s degree and $1,497 for those with a doctoral degree.

If you Google the phrase “education pays,” the very first hit you’ll get is a page at the Bureau of Labor Statistics that features a chart representing the median weekly earnings in 2007 of people with various levels of education. The higher the level of education, the higher the income. For example, high school graduates earned $604 per week, compared to $987 for those with a bachelor’s degree and $1,497 for those with a doctoral degree. The figures are derived from the Current Population Survey.

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The chart makes a compelling case and is probably popular with guidance counselors. My daughter, who teaches a GED class for Spanish-speakers at a community college, has used the figures from this chart in a brochure aimed at recruiting students. I have used the figures in a book for JIST. A related fact that is often quoted is that the advantage of a college degree has been growing in recent years.

But this week I came across a study that qualifies the information in this chart. The article, “Real Wage Inequality,” by Enrico Moretti of U.C. Berkeley, does not refute the “Education Pays” figures, but it points out that earnings are just one factor in the equation of well-being. Moretti notes that, from 1980 to 2000, college graduates have tended to concentrate in cities, especially in cities where the cost of housing is higher and has increased rapidly during this period. (The differences in housing costs do not seem to be related to housing quality. That is, college grads do not seem to live in a more expensive style of housing; rather, they live where the same kind of housing simply costs more.) As a result, the advantage of the college degree in terms of spending cash is not as great as the chart might suggest.

Specifically, Moretti found that half of the college wage advantage disappears when one accounts for the difference in housing costs. For example, in 2000 the college graduates were earning about 60% more but were enjoying an actual advantage of only 37%–43%. He also found that the increase in the advantage of a college degree between 1980 and 2000, often said to be about 20%, actually is between 8% and 10% when  housing costs are factored in.

It’s interesting to consider the question of why college graduates are concentrating in these high-rent cities. Moretti evaluates two possible explanations. The demand-pull hypothesis assumes that high-skilled workers are more productive in these cities, and therefore job opportunities are attracting college grads there. The supply-pull hypothesis assumes that college graduates are flocking to high-rent cities because they are attracted by amenities other than employment, and their presence in these cities is driving up rents. Moretti argues for the demand-pull hypothesis, noting that as college graduates crowd into cities, their relative wages also get a boost, indicating their greater productivity. However, he does not rule out that a supply-pull phenomenon may also be occurring.

Moretti bases his comparisons on pre-tax earnings, but he notes that taxation causes further erosion of the college advantage. Because the federal income tax is progressive, college grads in expensive cities may have higher pre-tax earnings, but this comes with a larger tax bite in addition to the rent bite already noted. Furthemore, he notes, the tax codes in California and in New England coastal states are also progressive, meaning an additional tax bite for college grads there.

Would these findings change my advice to a young person? Not at all. Education may not produce as great an increment in spending cash as the BLS chart suggests, but it still provides an advantage. It also provides many nonmonetary satisfactions that economists rarely measure.

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