The private returns of higher education are considerable, both in terms of employment opportunities and earnings, and scale with education level

The impressive private returns of higher education are fairly well-known in economics¹. So much so that it may be difficult to find a more validated stylized fact in the field. This reality has not changed since the great depression². In fact, it may very well have accelerated³.

Yet, in the face of rising tuition costs in many OECD countries, public challenges to the importance of higher education remain. In a context where changing technologies increase the value of an adaptable, well-trained workforce, the US are currently observing a slowdown in the accumulation of higher education attainments⁴.

A World Bank study by Montenegro and Patrinos (2013)⁵ has shown that despite a common argument that trade schools should be prioritized over university education, the returns of education scale with the academic level reached. Lower education levels bring lower returns, and vice versa. This coincides with the general trend observed by other studies, in which each additional level of education tends to be associated with better employment and earning outcomes.

Of course, it would be absurd to claim that this means the acquisition of a university degree automatically guarantees higher lifetime earnings and lower unemployment periods. But the skills and relationships acquired throughout higher education tend to improve an individual’s capacity to adapt to a changing labour market, improving their socioeconomic prospects.

Hout (2012)⁶ provides an interesting addition to these findings; the study’s results show that education offers even higher returns for groups which, all things being equal, have a lesser tendency to acquire it. The human capital produced by higher education may offset other disadvantages – like diminished access to financial capital or lower networking potential – and enable an individual to achieve higher socioeconomic success.

 

Lead researcher’s note

The debate surrounding higher education often includes the topic of field of study choice, which is perceived to be particularly influential in determining actual returns from higher education. Including a discussion on this factor was considered, but decided against. Instead, our team will be working on a stylized fact on this specific dynamic.

 

Related keywords

Education

Lifetime earnings

Employment and education

 

Significant papers

[1] Harmon, C., H. Oosterbeek, et al. (2003). “The returns to education: Microeconomics.” Journal of Economic Surveys 17(2): 115-155.

[2] Hanushek, E. A., G. Schwerdt, et al. (2015). “Returns to skills around the world: Evidence from PIAAC.” European Economic Review 73: 103-130.

[3] Tamborini, C. R., C. H. Kim, et al. (2015). “Education and Lifetime Earnings in the United States.” Demography 52(4): 1383-1407.

[4] Keller, E. (2014). “The slowdown in American educational attainment.” Journal of Economic Dynamics and Control 46: 252-270.

[5] Montenegro, C. E. and H. A. Patrinos (2013). “Returns to Schooling around the World.” Background Paper for the World Development Report: 8258024-132095074719.

[6] Hout, M. (2012). “Social and Economic Returns to College Education in the United States.” Annual Review of Sociology 38(1): 379-400.

 

Other references

Alba-Ramírez, A. and M. J. San Segundo (1995). “The returns to education in Spain.” Economics of Education Review 14(2): 155-166.

Björklund, A. and C. Kjellström (2002). “Estimating the return to investments in education: How useful is the standard Mincer equation?” Economics of Education Review 21(3): 195-210.

Fleisher, B. M. and X. Wang (2005). “Returns to schooling in China under planning and reform.” Journal of Comparative Economics 33(2): 265-277.

Gindling, T. H., M. Goldfarb, et al. (1995). “Changing returns to education in Taiwan: 1978-1991.” World Development 23(2): 343-356.

Heckman, J. J. and X. Li (2004). “Selection bias, comparative advantage and heterogeneous returns to education: Evidence from China in 2000.” Pacific Economic Review 9(3): 155-171.

Kuepie, M., C. J. Nordman, et al. (2009). “Education and earnings in urban West Africa.” Journal of Comparative Economics 37(3): 491-515.

Kosters, M. H. (1990). “Schooling, work experience, and wage trends.” American Economic Review 80(2): 308-312.

Lemieux, T. (2014). “Occupations, fields of study and returns to education.” Canadian Journal of Economics 47(4): 1047-1077.

Li, H. (2003). “Economic transition and returns to education in China.” Economics of Education Review 22(3): 317-328.

McKenna, C. J. (1996). “Education and the distribution of unemployment.” European Journal of Political Economy 12(1): 113-132.

McMahon, W. W. and M. Oketch (2013). “Education’s Effects on Individual Life Chances and On Development: An Overview.” British Journal of Educational Studies 61(1): 79-107.

Sum, A. and I. Khatiwada (2010). “The Nation’s underemployed in the “Great Recession” of 2007-09.” Monthly Labor Review 133(11): 3-15.

Webber, D. A. (2014). “The lifetime earnings premia of different majors: Correcting for selection based on cognitive, noncognitive, and unobserved factors.” Labour Economics 28: 14-23.

Sandgren, S. (2007). “Comparing annual and lifetime earnings: Distributions and wage premiums for a cohort of Swedish Men.” Journal of Income Distribution 16(1): 26-48.