Asymmetrical Information

The cash cost of a college education is very low because of the proliferation of government and institutional financial aid, at least for families at or below the median income. I'm convined that, ironically, huge increases in the amount of financial aid colleges give out are the cause of much of the extraordinary inflation in college tuition. Give more to the poor and working class students and make the middle class families (who are too rich to get anything but too poor to afford college without lots of debt) and the rich pay for it by raising the sticker price.

What is the opportunity cost, really? What are 18-21 year-olds going to be able to save? A couple thousand dollars a year? It's minimal.

Jane, do you think a bachelor's degree represents additional skills learned in college, or is it just a signal that the holder is smart and can learn? For degrees in disciplines that are not mathematical or technical, I think the value is almost entirely because of the signalling effect. Does this mean that employers in the past found the value of an employee by observing his performance on the job, while employers now prefer to rely on the piece of paper? Does the bachelor's degree represent skilles learned that are needed in a labor market that demands increasingly skilled labor? Both?

Jane did not post, winterspeak did.

The opportunity cost has 2 components.

1) What the 18-22 year old have been able to earn in the workplace if they had not gone to college.

2) What a 22 year old college grad can expect to earn over their lifetime compared to what a 22 year old high school grad can expect to earn over their lifetime.

1) is tiny today, but I'm sure was much larger 50 years ago. 2) is much larger today than it was 50 years ago.

The question is can 1+2 more than compensate for the increased cost of college attenance, assuming you get not financial aid (loans are OK).

As for the value of college, I think you learn some stuff, I think it signals some stuff.

Jane, while I agree that increased education is helpful (if not critical) in achieving higher levels of income, I think it's a stretch to say that higher educational achievement alone explains the differential.

Consider, for example, the very large income premium in professional degrees. I think that some of this premium is, indeed, explained by increased education alone. But there are other reasons, too. The preponderance of these professionals are either lawyers or doctors. Would the earnings expectations for doctors remain the same if the number of med school billets doubled, tripled, or quadrupled? Remember, too, that lawyers and doctors are enormously subsidized by the government. The subsides are both direct (nearly 50% of every healthcare dollar in this country is from government, government is an enormous employer of lawyers, Medicare pays roughly $80,000 for each and every medical resident per year, etc.) and indirect in the form of barriers to entry, barriers on telemedicine, etc. I think that constraint of the supply, barriers to entry, and subsidies account for some of the premium, too.

I'm sorry, winterspeak. Reflex action, I guess. ;-)

My apologies, Winterspeak. Y'all write about similar things.

BAs may learn some things, but I think those things are learned in about 4 out of 32 to 36 classes. One could learn those things more cheaply in a semester or two of specific training.

You can't leave financial aid out of this. That's like assuming a can opener. What has the increase been in what people are actually paying for college? I'm confident it's a lot less than the increase in the sticker price.

That's one I hadn't thought of*, Megan:

The opportunity cost of going to college is now much lower than it used to be, both in foregone wages while in school and in the wages you would have earned had you not gone to school at all.

Interesting.

*Hey! I'm an art historian!

Let's not forget that not all colleges are the same. Unless one is going for prestige or some very specialised training (or admission to a snooty medical or legal school), there's no particular reason to get a generic Bachelor's degree at an expensive school rather than the nearest inexpensive state school.

A middle class family need not get massive debt to send junior to Local College for four or five years, especially if junior gets some of the boring pre-req classes out of the way at a community college.

(This is much the same problem as lumping "college graduates" together; I suspect the median wage of people with an English or fill-in-the-blank-studies degree is much lower than people with a more "practical" degree. )

AT asks, "Does this mean that employers in the past found the value of an employee by observing his performance on the job, while employers now prefer to rely on the piece of paper?"

According to what I've read, employers in the past used to test prospective employees for qualities, such as intelligence, which they're no longer allowed to test for (either because the test is expressly forbidden or its use would open the door to bias lawsuits). So the credential is used as a proxy.

Jane, do you think a bachelor's degree represents additional skills learned in college, or is it just a signal that the holder is smart and can learn?

I'm skeptical that a college degree really signals that the holder is "smart and can learn". I suspect it has more to do with signaling social skills, dependability, stick-to-it-iveness, exposure to variety of social environments, ability to navigate the bureaucracy that accompanies dealing with a large organization...

In other words, getting the pigskin is a simple right of passage -- a small hurdle that, once overcome, signals there's a decreased liklihood that a person is a total ****up.

Is there any component to this increasing disparity that suggests the value of a high school diploma is now LOWER ( in terms of either signal strength or skills certification, if not both )than it might have been two to five decades ago?

It seems to me, naively, that to whatever extent that social promotion has increased and curricular requirements in math, science, foreign languages and world history have been reduced or eliminated, that there is now less to distinguish to a job-offers considering a hiring decision between the high-school grad and apparently bright and personable drop-out.

Imagine yourself as the employer who has fifty resumes in front of him. He has time to interview five applicants. But which five?

He needs a goal oriented achiever. A college graduate has set a goal and achieved it.

He needs someone who learns through reading, not managerial handholding. A graduate can read and understand (presumably).

He needs someone who will work hard under pressure. Graduates have pulled all nighters for tests.

He needs self discipline and a self starter. Nobody makes you go to class in college. The graduate's grades are probably a reflection of his study habits over raw intelligence.

First and foremost, smart employers look for personal character traits that signal success. Raw intelligence ranks a far second. Actual skills learned in school barely register.

BTW, some of the most successful people in our company are ex-military and more of our recruiting efforts are focused on this group. Again, it's the character traits that make them successful within an organization.

"His commentators get really mad, arguing that higher education is mere credentialism and that these higher wages are not due to any additional skill that higher education signals or produces, but that society rewards people based solely on which bits of paper they have, not what they can actually do."

If his commenters were right, then firms could make piles of money by hiring high-school dropouts at low wages, since they're just as productive as anyone else.

I think the empirical support for this hypothesis is, er, thin.

The crucial question is the extent to which education signals innate ability (Spence), and the extent to which it actually raises productivity. Of course, no matter how much of the return to education is the result of each of the two effects, they're both darn good reasons to go get that degree.

I think the question is whether the typical college graduate could make more by not going to college than by going. We'll never know, because the typical person who is capable of obtaining a college degree generally does so. But what if intelligent, motivated, individuals decided en masse to move directly into the workforce? My guess is that they would do quite well. The signalling gets you started, but its the intelligence and motivation that pays off in time.

I think leaving out the fact that in the last 40 years we have just imported an enormous amount of labor that mostly competes with high school graduates and dropouts, especially for unexportable service type jobs like cab driving, makes perfect hash out of any effort to quantify the value of a college degree, especially with regard to recent changes in its value.

Yes, but why did we import the workers?

Was it because the domestic supply was inadequate.

Isn't increased immigration just the free market
working?

CLEARLY a college education is not critical to career success or wealth, as demonstrated by a multitude of people in business and the arts. I doubt that a single profession exists that does not have some history of successful practitioners who did not complete college. To the extent that there are few of them now in a particular profession has more to do with the creation of barriers to entry than anything else. Still, in some states people can become lawyers without attending law school (via apprenticeship).

" But what if intelligent, motivated, individuals decided en masse to move directly into the workforce? My guess is that they would do quite well. The signalling gets you started, but its the intelligence and motivation that pays off in time."

I agree and I think we are more likely to see this in the future as the cost of higher education becomes increasingly untenable.

Yes, but why did we import the workers? Was it because the domestic supply was inadequate.

I'm not sure that 'we' did anything except to provide a hospitable economic climate and a generous immigration policies. The workers then came and found their starting niche.

Of course, since jobs at the lower end can be staffed by such labor, young middle-class workers tend to have higher expectations of what a 'job' ought to be -- for example, few high school students will pick cabages under hot sunlight, and expect that the alternative to a more comfortable service industry job is to keep applying until such a job becomes available. Meanwhile, first-generation immigrant workers keep the cabbages picked and the cost of cabbages low.

This afternoon, I used high school trigonometry to compose a volume integral that I solved with freshman calculus to produce a equation for a line of code in a program written using undergraduate computer science methodologies to perform a simulation employing numerical methods from graduate-level applied physics to solve a problem the significance of which can probably only be understood by a few people in the world with the requisite specialization in optics and signal processing. (O.K., maybe actually a few thousand people – it’s pretty cool, but it’s not rocket science…)

I’m sorry that some people don’t think they learned anything useful in school and that it’s all a bunch of credentialism, but I do wish some of them would stop sneering down their noses at me for my "vocational" education choices.

ArtDodger,

Clearly, education can add value, but undoubtably a smart person like yourself could have still figured all that out w/o a formal college degree - either on your own or while working in a position. It's not like other science geniuses haven't been self-taught.

Indeed, with OpenCourseWare from MIT and other similar offerings online, really smart people can learn quite a bit without having to pay much at all.

The main lost opportunity cost in going to college is 4 (or more) years when you could have been working your way up in a trade or a business. E.g., if you go to work for a plumber, in less than 4 years you'll be making more than most liberal arts graduates make right out of college. If your buddy goes to college in pre-med or law, by the time he has his license, you'll be an experienced plumber and could have your own business. You won't make as much as a doctor or lawyer, but you won't have a mountain of debt either, and there will be times he'll be begging you to hurry up and come over to fix the stopped-up toilet. (Of course, plumbers often have to work in very uncomfortable places and get covered in crap - doctors' work sometimes is even grosser, but never as uncomfortable.)

And there is no way to outsource plumbing repairs. I don't expect to see much outsourcing of medical care, most other good jobs are potentially vulnerable. That even includes lawyers - someone in India can't easily make a court appearance in the USA, but 80-90% of legal work is research and filling out papers, so all it would take would be teaching American law in India and the law firms might start firing everyone but their courtroom superstars.

Back in the 1960's, there were studies that showed that if someone with the right attitude and intelligence started work at a corporation straight out of high school, he [1] could make middle management sooner than if he had spent those 4 years in college. In other words, for most people 4 years of work experience was worth more than a college degree back then. (The professions and high-level accounting were exceptions, of course.) If he ever became a candidate for upper management he might regret not having a college degree, but there were CEOs with a highschool diploma or even less.

I think this has changed, aside from the trades that can't be taught in a classroom. I suspect that has less to do with higher job requirements than with social promotion in the schools plus employers' fears that just judging job candidates and employees by tests and demonstrated skill rather than credentials will lead to discrimination lawsuits. A whole lot of management work doesn't require more than what they taught in 8th grade 70 years ago, plus people skills and learning on the job - but you can no longer count on a high school diploma ensuring even literacy, let alone the arithmetic skill that was once required to pass 6th grade. Colleges still flunk people out, so a college degree proves that at least you can read and write. It generally also implies that you've managed to live away from parental supervision for several years without misbehaving so badly as to be expelled or imprisoned, and that you understand numbers well enough you didn't miss tuition payments or starve to death.

[1] It was "he" because women didn't have much chance at the management track back then.

"And there is no way to outsource plumbing repairs."

Not yet. Combine cheap high bandwidth with cheap digital cameras and a bit of improvement in price/performance of robotic arms, and you can outsource damn near anything.

In other words, for most people 4 years of work experience was worth more than a college degree back then.

Be nice to see a return of THAT. My father has had the rare fortune of working in the same place of business for >30 years, and one disconcerting change he has witnessed is that managerial positions are now rarely staffed by people learning the business from the bottom-up approach. Instead, the degree is all that matters, and so you end up with management that understands what they were taught in business school but not the intrinsic properties of the business unit they're supposed to be managing.

The problem of analyzing the role of college is quite complicated but here is one interesting point to consider: The increased demand for entry to the best colleges and most of American grad schools by foreigners.

Remember, foreign students often head back home and have a choice of schools all over the world, yet the US is the preferred destination of the best and wealthiest students from abroad.

Chinese and Indian students do apply to European, Canadian, and Asian universities, but overwhelmingly prefer US grad schools even if they intend to go back home.

That means grad school here is really valuable, which also suggests that undergrad training here is more valuable the more it resembles US grad school.

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A report that does a nice job making the connection between a college degree and income was released last week by some Berkeley researchers. The url is
http://www.collegecampaign.org/Return_On_Investment_Final_Report.pdf

Although the correlation between higher incomes and college diplomas does not prove that the latter is causing the former, the strong positive relationship certainly suggests that it is economically worthwhile to have a college diploma, both for the individual and society as a whole.

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