April 22, 2007
The Benefits of Education
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
Is Higher Education a Good Investment?--Posner's Comment
Becker marshals convincing evidence that people who have more education have on average higher earnings and that the spread has been growing. But it is a bit of a leap to conclude that there are high (and increasing) returns to education. Correlation is not causation. Suppose what are increasing are not the returns to education but the returns to intelligence, and suppose that people with high IQs both enjoy education more than other people do and are more likely to be admitted to college or a graduate or professional school because teachers prefer teaching (and learning from!) them and because good students are more likely (because they are more intelligent, not because they are good students) to be affluent, and therefore generous, alumni.
Now if this is correct, one might expect many intelligent people to bypass college, because it is so costly; but few do. However, colleges and graduate (including professional) schools provide a screening and certifying function. Someone who graduates with good grades from a good college demonstrates intelligence more convincingly than if he simply tells a potential employer that he's smart; and he also demonstrates a degree of discipline and docility, valuable to employers, that a good performance on an IQ test would not demonstrate. (This is an important point; if all colleges did was separate the smart from the less smart, college would be an inefficient alternative to simple testing.) An apprentice system would be a substitute (and there is evidence that in Germany it is a highly efficient substitute), but employers naturally prefer to shift a portion of the cost of screening potential employees to colleges and universities. Because those institutions are supported by taxpayers and alumni as well as by students, employers do not bear the full cost of screening.
These points are consistent with higher education being a good private investment, but do not suggest that it is either a particularly good social investment (it does improve matching of employees to employers, but at great cost) or that its value has much to do with the institution's educational program.
Another good that higher (or for that matter lower) education provides is the creation of social networks, consisting of the students who get to know each other. They learn something from associating with other intelligent kids and they form friendships with them that may carry over into adult life and become business or professional relationships that enhance the graduate's income. Again that would be a benefit having little or no connection with the school's educational program. There may be little value added by the program to the contribution that attending college makes to a person's income.
Orley Ashenfelter, Alan Krueger, and many other economists have worried about the possibility that the correlation between education and earnings is not causal and have tried a variety of ingenious methods for correcting for differences in ability, such as comparing the earnings of twins who have different amounts of education, on the theory that they have similar native ability, or comparing the earnings of people who have different years of schooling just as a function of the arbitrary age cutoffs that determine when one starts school, or seeing whether an increase in the age at which students are permitted to drop out is associated with an increase in the earnings of that cohort compared with its predecessors. Some studies correct for performance on standardized tests assumed to measure intelligence rather than knowledge. Most studies find that education has a substantial effect on earnings independent of native ability, and the convergence is impressive. However, the studies are convincing mainly about the benefits of precollege education.
I am skeptical that it should be a national priority, or perhaps any concern at all, to increase the number of people who attend or graduate from college. Presumably the college drop-outs, and the kids who don't go to college at all, do not expect further education to create benefits commensurate with the cost, including the foregone earnings from starting work earlier. This would be an entirely rational decision for someone who was not particularly intelligent and who did not anticipate network benefits from continued schooling because the students with whom he would associate would not form a valuable network of which he would be a part, either because he could not get into a good school, in the sense of one populated by highly promising students, or because if he did get into a good school the other students in the school would not consider him worth networking with.
This assumes that enticing the unwilling or the unmotivated to attend or complete college would not confer social benefits in excess of the private benefits (which I suggested in the preceding paragraph would probably exceed the private costs). But the marginal students are unlikely to be kids who, with a little more education, would make the kind of contribution to society that a worker is unable to capture in his wage. Nor are these marginal students likely to be educated into an interest in political and societal matters that will make them more conscientious voters or otherwise better citizens.