Bad news on the private return to college

Sang Yoon Lee, Yongseok Shin, and Donghoon Lee have a new NBER paper:

Going to college is a risky investment in human capital. However, we highlight two options inherently embedded in college education that mitigate this risk: (i) college students can quit without completing four-year degrees after learning about their post-graduation wages and (ii) college graduates can take jobs that do not require four-year degrees (i.e., underemployment). These options reduce the chances of falling in the lower end of the wage distribution as a college graduate, rendering standard mean-variance calculations misleading. We show that the interaction between these options and the rising wage dispersion, especially among college graduates, is key to understanding the muted response of college enrollment and graduation rates to the substantial increase in the college wage premium in the United States since 1980. Furthermore, we find that subsidies inducing marginal students to attend colleges will have a negligible net benefit: Such students are far more likely to drop out of college or become underemployed even with a four-year degree, implying only small wage gains from college education.

This is a very important result…Bryan Caplan, telephone!

Ungated versions of the paper are here.

Comments

First. And let me add this paper is simply saying the obvious: college grads do better than expected due to some college students dropping out and skewing the averages. Or so it seems.

Yep, that whole GI Bill was a complete waste of public money - publicly supported students going to publicly supported universities. No wonder the U.S. stopped being the world's leading center for research, and the envy of the world in terms of the living standards those graduates enjoyed, sometime in the 1960s, right?

The GI Bill was not a waste of public money - the takeaway from the paper isn't that college is a "bad" thing, just that it's not "good" for 100% of the population to have a college degree. Many/most/all of the GI Bill college grads were already "college material," based on intelligence, work ethic, etc. College participation is MUCH lower today than it was back then.

We've reached the point of diminishing returns. Giving a free college education to someone who can't hack it is a waste of money.

Correction above - it should read "College participation is MUCH higher today than it was back then." Need more coffee...

I read prior approval's post as sarcasm.

The returns to college education were higher when costs were lower and college degrees were rare.

Now that costs are higher and college degrees are common, the returns are lower.

Isn't that obvious?

Not to someone of p_a's intelligence, no. But that figures, since he's such a fan of Germany and all the lying, cheating companies over there.

I think your comment is more about public returns to college.

I'm not happy that research confirms what I have suspected: for the lower half, college is not a good investment, the (outrageous) cost far outweighing the potential benefits. It hasn't always been so, as the lower half once had many opportunities in lower management, sales, the local bank, real estate or insurance brokerage, and the family (often retail) business. Those opportunities have all but disappeared and aren't coming back. This will have adverse consequences to the large public university, which depends on the lower half: they pay the tuition, support the athletic programs, make the contributions to the foundation, promote the university. Take away the lower half and how does the large public university survive? It won't. And death is likely to come quick, as austerity-minded state legislatures accelerate the defunding of the public university.

"how does the large public university survive? It won’t" I repeat my old song: Dissolution of the Monasteries.

So how is the large public university dissolved?

Large public universities are a major fixture of the economy and infrastructure once you are out of the Northeast and Midatlantic. Does Ohio State disappear? Or Mizzou? KU? Kansas State? These are major focuses of regional identity, and you need to keep producing engineers and school teachers and fertilizer salesmen. You need a place where rich farmers and local businessman can send their kids before they enter the family business and you need places to produce the managers they hire to run that business. On top of that where are your doctors and nurses going to come from? CPAs and industrial scientist to invent things like soylent green and sell pesticides? Where are your government functionaries and army officers to come from?

These jobs were needed and important long before the rise in tuition and even before the GI bill, private colleges provide very little expertise in mich of this and except for the déclassé part of Cornell none of the Ivey's do either.

Unless you are defining large public universities to just be places like George Mason, Grand Valley, and Florida International. But then what is Washington State or Wyoming?

Taking Kansas as an example:

I doubt the major flagships would be dissolved, but the smaller state schools would be at risk and perhaps the smaller municipal ones as well. Community colleges would probably be saved and even expanded as it seems making them "free" is a popular initiative now.

Consider, KU (enrollment: 28,091 total fall 2015) and K-State (24,146 fall 2015) may not dissolve but Emporia (6,094 fall 2015), Hays (14,210 fall 2015), Pittsburg (7,244 fall 2015) are likelier. Those are all relatively rural schools. Without the universities those towns would be more or less devastated (any of these would be actually, its not like Manhattan has much to offer besides the school. Lawrence could serve as a bedroom community/suburb of KC but would still be decimated without KU.) I'm not sure how Washburn (6,615 fall 2015) or WSU (14,495 fall 2015) would fare. Their being in a large metro and near the state capitol may save them.

Haskell University (1000~) is also in Lawrence and is a federally funded Indian college, unlikely to ever fold.

There are 19 community colleges throughout the state with a total enrollment of 81,155 full time and part time students. Enrollment stats gathered from wiki/cappex.

There are then 11 technical schools and colleges, many of these are associated with larger schools. There are 29 private colleges and universities, consisting of small religious schools and for profits like ITT.

Just between the state universities, Haskell and community colleges there are roughly 183,000 enrolled in colleges as Kansas. I don't have time to estimate the technical schools and private colleges. The total population of Kansas is 2.9 million, making roughly 6% of the total population enrolled in some sort of public education.

The smaller public schools and the small but high cost private universities would be the first to go if the system experienced a shake up.

I encouraged my nephew (now a freshman in college) to pick a college that can be distinguished from the rest (no, I didn't mean to pick a college based on the football team's ranking). The obvious distinction is its academics (or reputation for academics). But with so many schools whose only difference is the state in its name, it's hard to rise above the rest. My observation is that GMU has distinguished itself and will survive the coming apocalypse (I couldn't help myself). How? It certainly helps to be on the winning team; and in the ongoing class war, I don't expect the pathetic poor, the destitute and downtrodden, and the middle multitudes to prevail. Do you?

It seems a reasonable, if cliché, advice.

I often comment on America's disinvestment in productive capital, adding the point that real estate is not productive capital. Anybody notice how colleges have been spending like drunk sailors on new facilities, and not just new football and basketball facilities. Does all that new real estate make colleges more productive? Are college campuses the new pyramids?

Heavens !!!

How can we overlook the "contributions" that the academically certified make to "our" society?

Is that not THE function of the certification, rather than individual aggrandizement?

How else shall we "advance" collectively?

Why are universities "Public" ?

Having trouble with the link to ungated version.

What if college is consumption, not investment?

What if the purpose of college is to entertain, not to learn?

What if "Animal House" is a more accurate description of college life than "Good Will Hunting" (or whatever movie shows actual learning happening).

Model that, bitches.

Last stats I saw on this was a long time ago so not sure how accurate they are now but it used to be the case than something like 50% of college grads made their working careers outside their area of study in college. That suggest for a lot of people college is consumption more than investment -- though learning and entertaining one self are not mutually exclusive.

The other thing to muse about is the degree to which academia is a form of consumption by the professors rather than really any form of strong social investment activity -- the source of that claim is related to the number of articles researched, drafted, explored, brown-bagged, maybe submitted and perhaps accepted for publication than then are ready by a handful and generally never sited by anyone other than members of the same department to support one another.

"Last stats I saw on this was a long time ago so not sure how accurate they are now but it used to be the case than something like 50% of college grads made their working careers outside their area of study in college."
It can be a IQ/conscientiousness screening device for the employer. It arguably can make the graduates' wage and employability bigger even if they do not use what they learned.

How much, I wonder, IQ/conscientiousness weight does an employer give to an Anthropology, Communications or Kinesiology degree from an average state university? Does that degree merely give the grad a edge over the non-degreed when applying for a barista position at Starbucks?

"something like 50% of college grads made their working careers outside their area of study in college"

I'm not necessarily referring to you but when people try to make a point on this I have to wonder if they have any idea what a bachelors degree curriculum tends to be like. 20 seconds on google and you can find out. For a given major, often over half the coursework for the degree isn't in the major subject. Engineers take writing classes. English majors take math classes. Are writing skills not valuable for engineers? Are math skills not valuable for writers? Why not take the logic further and start removing economics and history classes from high school - after all, hardly anyone becomes a historian or economist.

Mark Bauerlein, a professor of English at Emory University, once estimated that 21,000 articles have been written on Shakespeare since 1980. Wouldn't 5,000 have been enough? Richard Vedder

I just did a college tour this weekend with my son (HS Junior) - it was a large state school. It was amazing how many times the quality of the food came up as a point of pride/selling point. If that's not consumption, what is

A very good post. "College is consumption" explains a lot, including the petulance upon being exposed to ideas they don't like.

Some college expenses are clearly consumption - room and board, entertainment, student lounge, climbing wall... Some college courses are also consumption goods. Some college courses (almost all in an engineering school) are clearly investment. So I see college as a mix of both consumption and investment.

It can make sense to borrow to fund the investment portion. Borrowing to fund consumption is generally a poor choice.

"(almost all in an engineering school)"

Oops, html ate my comment. There's supposed to be "makes jack off motion with hand" at the end of that.

College is consumption

http://www.forbes.com/sites/carriesheffield/2015/04/24/is-college-an-investment-or-consumption/

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Seth Zimmerman's paper in JOLE a couple of years ago says the return to college for marginal students is quite high. http://www.jstor.org/stable/10.1086/676661?seq=1#page_scan_tab_contents

I was going to cite this paper, as well. Seth's paper surprised me, because my own prejudice would be more in line with the paper Tyler cited. But perhaps the return to "some" college for academically marginal students is actually quite high.

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*** Tyler Cowen ***

Can you please implement some kind of spam filtering to stop the spammers from ruining the comments section of your website?

Thanks!!

perhaps some sort of commenting authorization permit or VISA

Just put everything behind a paywall.

The trick is going to be convincing the spambots to pay us to build it....

Thread winner. Outstanding.

Alternatively the spammers could make a deal with MR and share the profits with them while continuing to lower the quality of the comment section. MR benefits, Spambots benefit and those who comment don't really matter. Win Win Win

To be fair, I doubt spammers are even the 25 th biggest source of ruin around here.

I was going to say--I'll take a spam bot any day over a disgruntled former employee of GMU; a self proclaimed sex tourist; a racist, homophobic, conspiracy theorist with possible multiple personality disorder, and a troglodyte throwback to the turn of the 20th century living somewhere in bumblefuck upstate and plotting the overthrow of Vatican II.

Comment of the day!

I don't know what's least helpful, TC's incorrect reading of the conclusions of the paper, the silly model in the paper, or the commenters declaring the victory of their priors based on a wrong reading of an inconsequential paper.

"TC’s incorrect reading of the conclusions of the paper"

Huh? The post is just a quote of the paper's summary.

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I find it curious that there are all there all these forecasts of lower level public unis failing rather than the lower level privates. The latter are more expensive, and it is not obvious to me that they are superior in quality to the lower level publics. At the top the privates beat the publics (although such places as Berkeley and UVa give the Ivies a run for their money). But there are a whole lot of privates nobody has heard of out there, many heavily religiously affiliated, that are just not all that good. Of course the most vulnerable of all would seem to be the for profit places, which are very expensive and apparently really low quality. At least for in-staters the publics are noticeably less expensive, which does help on that old bottom line rate of return measure.

A modest proposal: Majors that end in 'studies' (gender studies, racial studies, etc) bring no economic benefit to the students, and are probably a net negative to society and should be taxed as an externality cost instead of being subsidized through student loans.

What percentage of the protesters disrupting classes at Yale and Mizzou are members of such programs?

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