Do you get a return on investment if you get a university or college degree? Does the taxpayer get an ROI for any subsidies provided? Economics Explored host Gene Tunny discusses how economists crunch the numbers on the ROI of education with his colleague Arturo Espinoza. Gene also gives an update on the US economy, covering the strong jobs growth figure for July 2022 among other indicators.
You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcasts, Spotify, and Stitcher.
Links relevant to the conversation:
Macrobond charts and commentary on the US economy (PDF)
Reassessing the College Wage Premium Payoff by Jack Salmon, Mercatus Center, George Mason University
Graduate Winners: Assessing the public and private benefits of higher education by Andrew Norton
Estimating the public and private benefits of higher education report from Deloitte Access Economics
Median weekly hours data by qualification for Australia (Australian Bureau of Statistics)
Transcript: ROI of education: how economists estimate it + US economic update – EP152
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored.
Arturo Espinoza Bocangel 00:04
The mincer equation suggests that each additional year of education produces a private rate of return to schooling about five to 8% per year.
Gene Tunny 00:17
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official.
This is episode 152 on the Return on Investment in Education. Joining me is my Adept Economics colleague, Arturo Espinosa. Arturo, good to be chatting with you.
Arturo Espinoza Bocangel 0_00:00:41_
Hey, Gene, it’s my pleasure to be here.
Gene Tunny 0_00:00:44_
Excellent, Arturo. So, today, what I’d like to talk about is the return on investment in education. So, whether it makes sense for people or rather the typical person to go to university or college. So, we’re talking about the typical person rather than a Bill Gates or Steve Jobs who dropped out of a top university and ended up founding a billion-dollar company, despite that. There are always going to be exceptional individuals who can thrive even if they don’t finish university. So, we’re not necessarily talking about them. Okay.
We’re talking about the relationship between education and earnings and GDP at that population, or the whole economy level or for the average rather than specific individuals. And this is based on a question that came from one of my listeners – Dave, and he asked what I thought about this issue. Can economists demonstrate whether there is a return on investment in education? So, I thought this would be a good topic to cover on the show. So, if you’re happy to chat about it, we can get stuck into that a bit later. Okay.
The first thing I want to do though, is I just want to go over this issue of what’s happening in the US again. So, I published an episode last week on US recession; is the US in recession or not? There’s a big debate about it. And the funny thing was, just as I was about to publish it, the Bureau, I think it was Bureau of Labor statistics released the new jobs figures, and they were strong. And that has really changed people’s views on how the US economy is going. It lends support to the view that the US is probably not in a recession at the moment. So, that came out just before I published it. And I thought, Okay, well, I’ll publish it, I’ve got the episode ready. I’ll cover this in the next episode, because it’s an important update.
And this new report showed that; and this is according to the Guardian, and their quote in the actual data. So, it’s right. The US added 528,000 jobs in July, the jobs market return to pre pandemic levels, the US has now added 22 million jobs since reaching a low in April 2020. Unemployment rate dipped to three and a half percent. Okay. So, this has meant that the talk about the US recession that’s died down a bit, because this jobs report was so good. And just today, we’ve learned about new inflation data in the US that so it looks like inflation on a monthly basis is much lower. So, that’s suggesting to some economists that maybe the Fed doesn’t have to hike rates as much as was previously expected. And therefore, there may be less risk of the US going into a recession because of what the Federal Reserve’s doing. Of course, these are month monthly data. And I one thing I always caution about monthly data is you don’t want to read too much into month-to-month changes, because there could be statistical error; statistical noise in the data. And you can be misled by that. So, you want to look at things over, over many more months than that. So, that’s the one thing I’d say about that.
It just goes to show how difficult it is to forecast or even to understand even to nowcast, even to understand where the economy is at the moment. And there’s a big debate still about what’s happening in the US. I received a great note from the macro data service that we subscribe to here, in Adept Economics. They said that’s macro bond. And they’ve looked at a range of data they sent out a great note on this. I’ll put a link in the show notes. And they’ve looked at the various indicators that the NBER, the National Bureau of Economic Research; what it looks at when it calls the business cycle in the state It’s and it’s not just GDP. It’s things like well, nonfarm payroll employment, personal consumption expenditures, real industrial production, real manufacturing and trade sales, real personal income, excluding current transfer receipts. And there’s a chart that they have there that shows that if you compare those indicators; these six major indicators with where they were earlier in the year, in January, most of them are still above where they were, except for real manufacturing, and trade sales in this chart here. So, I’ll put that chart in the show notes or a link to that so, you can see that.
But what that’s telling us is that some indicators are suggesting there could be a downturn, others aren’t necessarily suggesting that. And the jobs market data, as we noted before, are incredibly strong. On the jobs market, on the labour market, I do have to note that the very high rates of job openings that they’ve had, so the jobs that are available, that is starting to come off from the very high level. So, there’s a chart that macro bond has produced from the job openings and labour turnover survey, and we had numbers up around 12 million, so 12 million vacancies, 12 million vacant jobs, and that’s fallen to below 11 million now, if I’m reading that chart correctly. Still, much higher than it was pre pandemic. So, it looks like there’s still very strong labour demand in the States, but it is coming off.
Okay, so what do we make of this? It’s all a bit of a confusing picture. It’s probably too soon to tell whether the US is in recession or will go into recession. That said, I think Janet Yellen, the Treasury Secretary did make a risky call when she was so adamant that the US isn’t in one at the moment, because there’s always a chance that the economy could react badly or households could really react badly to these interest rate increases to try to control inflation, and then you do end up in a downturn. And then, months later, Janet Yellen is having to apologise for that, because she spoke too soon.
Okay, so the main topic is going to be return on investment in education. So, we’ll get on to that now. And there are some big questions around this issue of the return on investment in education. So, what are those big questions? Okay. One, does it make sense for individuals? So, for people to go to college or university.
Okay, now, there’s a general expectation or a general view that, you’ve got to finish high school, right? I think all the data suggests, you’ve got to finish high school, there are big returns to finishing high school. If you don’t finish high school, then your career prospects are limited, you’re going to end up in minimum wage jobs for the rest of your life. So, we know that completing high school is a positive thing. And therefore, state governments and school boards around the world fund secondary education.
There’s a bit of a question now about well, what about tertiary education? And does it make sense for individuals to go to the tertiary education? And this is a question that economists are well placed to answer because it’s a question about the return on investment, isn’t it, Arturo? It’s a question of what you’re doing is there’s a tradeoff there. I mean, you’re sacrificing earnings that you could make today; you’re forgoing some earnings by going to college or university, rather than going straight into the workforce or working full time, you could have a part time job, of course, you’re spending all of this time. So, there’s an opportunity, cost of your time, three or four years in university or even more if you want to be a doctor, and then that’s in the hope of having higher earnings over your lifetime. So, you’ve got to think about well, does that make sense as an investment? Does it makes sense to make that investment? Now, those foregone earnings, any tuition fees, you may have to pay? Or loans you have to take out and then pay back? Do you get compensated for that through your lifetime from higher earnings? I mean, the general answer, the broad answer is yes. I mean, if you look at the data, people with higher education degrees, earn more on average than those without; we know that. We’ll go over some figures a bit later in this episode. We’ll look at some of the studies. So, we know that occurs, the question is, does that compensate you enough for the cost of the tuition and also the foregone earnings? So that’s the basic economic question, isn’t it?
Arturo Espinoza Bocangel 10:11
Yes, definitely. Yes. Individually, you will face that important decision between, okay, if I study one additional year, how much I will receive as a return. For example, in my case, I study Economics in Peru, then I was there around five years, and then I decided to study overseas. And I choose to study Mastering Economics and Public Policy here in Australia, because at that moment, I expected to receive or a higher return for those years of education. That was a purely economic decision. So, that’s why I’m here now in Australia after finishing my Masters, and now I am working with you.
Gene Tunny 11:10
Very good. Yes, yes. I think what you find too with students who come from overseas to either Australia or to United States or UK, I mean, there’s also a benefit from coming to an economy with higher productivity on average or higher earnings. So, there’s certainly a benefit there, that helps out too, and also, there can be benefits to some people, because if you get permanent residency or citizenship in a country, that can be a great benefit to people to, of course.
Now, we’ve been talking about financial benefits. One thing I should acknowledge, because I know if you’re, you know, some people might bring it up in the audience, because it is a point that does get made from time to time. It’s this point that they are going to be non-financial returns to tertiary education. Okay. I mean, university is one of the best, the some of the best years of your life, really. I mean, if you get involved in various activities at uni., you make great friends. I mean, you could join a debating society, various other clubs, you make friends for life, interesting people, a great conversation. So, there are all of these non-pecuniary returns as well. But we’re not factoring those into this discussion, because you can’t really measure those.
So, we’re talking about does it make sense for individuals to go to college? And yes, economists can attempt to estimate this, given the available data. And the way they do this is through these mincer earnings regressions. Now, I’m going to ask you about those a bit later, because you’ve been looking at that. And that’s after Jacob Mensa, who is a Professor of Economics at Columbia University in New York City. The studies of the returns to education, they’ve been helped out a lot by just the great data sets we have now in many countries. However, in Australia, we have this Hilda survey, this household income and labor dynamics Australia survey, which is a longitudinal survey. So, it’s panel data, you’re tracking individuals over time. In the US, there’s the Panel Study of Income Dynamics, which is the gold standard panel data, set or longitudinal data set, and that’s what the Hilda was trying to replicate.
So, one big question is does it make sense for individuals to go to college? And then, I think the other big question is, does it make sense for the government to subsidize college investment? University investment, to subsidize tuition to an extent. And what we find is that, I would say in most of the OECD economies, or in most of the advanced economies, there are very substantial subsidies to higher education in Europe and the UK, in Australia, although it’s a mixture here. I mean, we’ve got an income contingent loan scheme, which was called HECS I think now it’s called help, but it’s the higher education loans program whereby there’s some subsidy for your tuition, but the rest of it you effectively borrow from the government and you have to pay it back through the tax system. So, this HECS/help system okay. You’ve heard of that, haven’t you?
Arturo Espinoza Bocangel 14:36
Yes, I heard something about it, yeah.
Gene Tunny 14:39
So, in the 70s, the government at the time, the Whitlam government, I think you helped me out on a presentation we were looking at that; just the changes that came in during that government in the 70s. It made university education free, and that led to the Commonwealth would just subsidize the whole cost of course. And that led to a big increase in tertiary education. But by the late 80s, it was clear that that was very expensive, and that they had to introduce this HEC scheme as Higher Education Contribution Scheme where people would contribute when their income got over a certain level. So, it’s an income contingent loan. And this was something that was designed by Bruce Chapman who was an economist today.
Initially, the amount of HECS you had to repay was pretty low, I hardly had to pay anything back when I went through in the 90s. But over the years, it’s become a bit more substantial. But still, there is a very generous subsidy from the Australian Government to higher education here in Australia. I think there’s some support in the states in the US, depending on what sort of college you go to. There are state colleges, there’s state university system saying California, there’re student loans you can get, there are scholarships; I think there are more private scholarships in the US than there are here in Australia. But generally, there’s less public support, less public subsidy for university or college education in the US than there is an Australia. We’re not as generous here in Australia as they are in the UK, or in the continental Europe, in France or Germany.
Arturo Espinoza Bocangel 16:28
What about those developing countries, like Peru, and Chile? I know that those ones are still providing scholarships to study overseas. So, they tend to promote national student to study around the world in order to enhance their knowledge and then come back.
Gene Tunny 16:56
Yeah, yes. Yeah. I’m not an expert on that, Arturo but yeah, if actually, we probably should look at what’s happening in some of those other countries, in Latin America sometime that would be interesting. Okay.
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 17:45
Now back to the show.
So, they’re the big question. Are there returns to individuals to go to college? Does it make sense for the government to subsidize college? And look, there’s another, there is another question that sometimes comes up, but it’s not one we’re going to explore in great detail on this episode. Have you heard of this sheepskin effect?
Arturo Espinoza Bocangel 18:12
Gene, more or less, yes, yeah.
Gene Tunny 18:14
So there’s this idea; there’s this effect called the sheepskin effect. It’s named after the fact that, I think once upon a time, university degrees, so if you got it from Oxford, or Cambridge, or Harvard or Yale back in the, the 18th century, or whenever or 19th century, your degree was on sheepskin. So, I think that’s where it comes from. But there are some economists who have speculated that if you look at the average earnings of people who complete year 12, or finish school, or finish a university degree, versus those people who nearly finished it or similarly experienced or similarly clever, or whatever as the people who actually did get the degree or the diploma than the people who got the degree or the diploma, get an extra benefit, it looks like they get a boost in their earnings relative to those people who look very similar other than the fact that they just didn’t get a qualification.
So, there’s this view that, well, there’s this sheepskin effect. And some economists have speculated that that means that a lot of education is just sorting, it’s just figuring out who are the highly productive people that doesn’t actually confer much of a productivity benefit itself. All it is, is it’s signaling, it’s signaling that these people are high quality individuals. And that’s what the benefit of that education is. Yeah, I mean, one of the prominent economists associated with that view is Brian Kaplan. He wrote a book – The Case Against Education for Princeton University Press he’s associated with, might be George Mason, I better get that right. I’ll check and put it in the show notes, but he’s often on Ross Roberts’s podcast – Economics, or Econ Talk, I mean. He’s quite prominent in making in expressing that view.
I’ll put some links regarding that sheepskin effect. I’d like to think that a lot of the benefit from education is certainly it is from lifting your productivity or making you think critically, I mean, as a former university teacher, and as you are, I mean, you’re doing some tutoring there, you would like to think that most of the benefit that you see in terms of higher earnings of university graduates is related in some way to what they learn or the development of critical thinking skills at university.
Okay. So, just note that as a bit of a caveat or a qualification on what we’re talking about today, and maybe we’ll come back and look at it in a future episode. Any of these topics, Arturo, anything in economics; there’s just so much you could talk about, there’s so many studies, so many different perspectives, we just have to limit it to what we’re looking at today.
Okay, so you found an interesting study on the return on investment in education. It’s a Cross Country Study, is it? Can you tell us about that.
Arturo Espinoza Bocangel 21:25
It’s a very interesting study, and the author is Harry Anthony Patrinos, he’s an advisor from the World Bank. And he also specialized in the Economics of Education, particularly the return to school in school based management, demand side financing and public-private partnerships. So, his study, which is related to the return to school in using the mincer equation. Basically, he highlights that the mincer equation suggests that each additional year of education produces a private rate of return to schooling, about 5 to 8% per year.
Gene Tunny 22:11
That’s a real rate of return, is it? And so, that would mean, it’s a relatively good investment. If you think about what’s the cost of borrowing or what’s the opportunity costs.
Arturo Espinoza Bocangel 22:24
With the current fee for example of inflation, that is not going to be a good value.
Gene Tunny 22:32
But is that a real return? I think it wouldn’t it be.
Arturo Espinoza Bocangel 22:34
It could be, but I’m not sure.
Gene Tunny 22:37
Okay, I will check that and put it in the show notes. How does he interpret it? Does he interpret that as a positive? Is he saying that it suggests that education does yield a good return?
Arturo Espinoza Bocangel 22:49
He’s positive. That is the main message that another important findings related around the world. So, in general terms, the returns to tertiary education are the highest. So, that mean that people who will study university level or trying to get a university degree, they will get a higher rate of return.
Gene Tunny 23:19
So, there are big gains from going to university then. So, he’s looked at all around the world, has he?
Arturo Espinoza Bocangel 23:26
Yes. it’s like considering most of the countries. Yep.
Gene Tunny 23:33
And has he just reviewed existing studies? Or has he done his own data analysis?
Arturo Espinoza Bocangel 23:38
It’s he’s own analysis.
Gene Tunny 23:41
Okay. Oh good. Well, I’ll put a link to that in the show notes so people can check that out. Generally, that makes sense, right? I mean, there are various studies that show there is a positive and a reasonably good return on investment, private return on investment for education for university or college education. And you talked about the mincer equation. So, what that’s trying to do, you’ve got this statistical equation, econometric equation where you’re getting data on earnings of individuals, is that right? And then, you’re looking at the different characteristics of those individuals, their sex, their age, their years of experience; whether they’ve got a qualification on all the things that you think could influence their earnings, and then you’re testing whether the contribution or whether there’s a statistically significant relationship between having a degree and your earnings and what’s that contribution, what’s the uplift to earnings from that degree, is that right?
Arturo Espinoza Bocangel 24:47
Yes, that’s right. That means your equation estimate the average impact on one additional year of education on the wage. Yeah.
Gene Tunny 24:56
Okay. So, then you could also use to determine whether; can you use it to determine whether a qualification, university education helps gives you an uplift?
Arturo Espinoza Bocangel 25:10
Gerry’s methodology when you use categorical variables.
Gene Tunny 25:16
Okay, categorical variable, okay, good.. So, you could you could determine that. I mean, there are a wide variety of ways to do this; many ways to skin a cat, probably many ways to specify the variables in a mincer earnings regression. Okay, so that’s that study that you mentioned. We’ll put a link in the show notes to that.
I’ve had a look at some studies from the States and from Australia. And for the US, I’ve looked at this; there’s this great briefing note that’s come out of the Urban Institute. And that’s a leading think tank in Washington, DC. It’s not particularly partisan. As far as I can tell. I think they do good work. I’ve had one of their people on my show in the past. Steve Rosenthal is a tax policy expert. And we talked about all of the various tax loopholes there are in the in the US. So, this paper from the Urban Institute that I think is really good is called Evaluating the Return on Investment in Higher Education: An assessment of individual and state level returns by Christian Blag and Erica Blom. So, they’re looking at does it make sense for individuals, for private people to go to college? Does it make sense for the state government in the relevant state government in the US. I think, because state governments have a big role in the provision of the college or they’ve got their own state-based university systems.
Here in Australia. Even the, even though the universities have been set up under state acts of parliament, typically, so there’s a University of Queensland act here in Queensland, there’d be a University of Sydney act in New South Wales. Even though that’s the case, the federal government has largely taken over university, so the funding of universities and administration of them or the policy settings for universities.
So, what this Urban Institute study finds or rather a review, and they do do some number crunching themselves, I should note. So, they find that, for most an investment in higher education yields a substantial economic and personal return, but this investment may not pan out for some students. okay, so we’re talking about students on average, or the majority of students; some people can obviously go to uni., and you know, maybe they have some bad luck. Or maybe they study something that’s not really in demand. So, we’ll talk about that a bit later. Because we’re economists we know that supply and demand is everything, ultimately, okay. And there are big differences in returns for different fields, and also between the level of the degree. So, they go, a bachelor’s degree recipient will typically have higher earnings than an associate’s degree recipient, and a Harvard graduate will likely earn more than a graduate from a nonselective four-year school. However, the relationship between the students selected degree level major and institution can be complex, in some degree major scenarios may not pay off until later in life or ever. Right. Okay.
Now, in that Urban Institute paper, they present some return-on-investment estimates. So, what economists call internal rate of return, which is a yield – an investment yield. So, what’s the rate of return you get on that investment? And so, they find, like, depending, and I’ll put a link to it in the show45 notes, but depending on the degree area, and depending on the level, it differs. So, business management looks pretty good. So, if you go to a private, not for profit, four year college and you do business management, you’ll get an 18% return on investment. The way to think about that is well think about, if you made an investment in the stock market, and you were getting, I don’t know, 7 or 8% or whatever, even less a year. And that’s not what you’d compare with that business management, that yield of 18%. Now, if they’ve calculated that properly, that should be a real rate of return. So, that’s a very good real rate of return, 18%.
So, business management, good stuff. I mean, we’re economists, so we’d probably fall in business management, unless we’re in social and behavioral sciences. Those rates of return are a little bit lower, humanities a bit lower too. Life sciences here are in your near calculations; they have relative well, much lower rates of return. So, 9% compared with the 18%, for business management, the worst here looks to be education at 7%. And yes, so education seems to be less lucrative than these other fields.
I’ll put the link in the show notes to that so you can check that out.
There are various studies of the returns on investment to different fields, and it’s going to depend on your country and depends on supply and demand too. I mean, if you’re in the US, for example, and you get an IT degree, or you specialize in artificial intelligence, or whatever the latest hot thing is, or data science, and you’re probably going to get a higher return on investment, because there’s a big demand for that sort of thing at the moment.
So, the Urban Institute paper moves on to talk about the return to the state government, whether it makes sense to have subsidies for tuition. And look, they just, we don’t really know as to how to work out. There are so many things to consider. You get additional tax revenue being; one of the big gains that governments get from subsidizing higher education is that if you get people more educated, more productive, they’re going to earn more, they’re going to pay more tax. And the way that; this is particularly the case in Australia because of the progressive nature of our tax system. So, as you earn more, you go your higher tax bracket, your marginal tax rate increases. So, there’s a big benefit to government. And we’ll talk about that a bit later.
I think, in the States, there is still a benefit to the state governments and they would be to the federal government, I think it’s probably less than what it would be in Australia. And one of the things that makes this so challenging is its tax, but it’s also the fact that the government could save money in other ways, too. There could be lower crime with if people are better educated, and then you don’t spend much on crime. There could be less spending on social services, on your transfer payments for those people. Well, we know that if you’re more educated, you’re less likely to become unemployed, you’re probably less likely to need unemployment assistance. Yes, that’s true. And you could also be healthier too. And you could save; I think there there’s some evidence that people who are better educated are healthier, in fact, I think they work out more.
Now, once upon a time, if you had a manual job, you would be fitter and healthier than someone who didn’t. This back in, I don’t know, early 20th century or something. But what’s happened? Nowadays, if you’re more educated, you’re more likely to work as a professional, then you’re probably more likely to go to a gym and go cycling, go swimming, than someone who isn’t.
Arturo Espinoza Bocangel 33:09
I know that there’re a lot of paper related to if you’re more educated, you will consume healthy foods.
Gene Tunny 33:19
That’s true. You’ll consume healthy foods and you probably don’t consume as many; you don’t have the unhealthy stuff. You probably don’t drink as much. You’re not having a beer after work every day. Yeah.
Not that I’m saying everyone’s doing that, we’re talking about averages. Because there’s certainly going to be, well, people who are highly educated, successful who are alcoholics right? And who have to sort themselves out. Rich Roll was a good example of that. Rich Roll is an ultra-endurance athlete. He’s got a great podcast. And he’s in California is in Malibu, and like, he talks about how he was, he’s a Stanford Law graduate, sort of a college swimming champion. And he was a lawyer, highly successful, but just drinking too much. partying too much, and it just caught up with him and he had to have a complete change of lifestyle and, and go to Alcoholics Anonymous, his story’s incredible. So, if you’re in the audience, and you’re interested in that, I’ll yeah, I’ll put a link to Rich Roll’s podcast because he’s fascinating. Okay.
The other thing to think about with the public return to education is spillover benefits, or the fact that if you have a more educated population, then that lifts other people up too. It’s sort of like that whole rising tide lifts all boats, or maybe that’s not the right analogy. But essentially, you If you’ve got more educated people in the workforce and other people can learn off them. And also, it can lead to greater innovation. And there are spillover benefits from innovation. So, more educated people, more creative people, they can solve problems, they can innovate and develop new products. And that provides a benefit.
And in that Urban Institute paper, they talk about some study by Moretti. So, a 1% increase in the supply of college graduates raises the wages of high school dropouts. 1.9%. Okay. Who knows? I’d have to look closely at that study to see whether that’s plausible. There’s probably an effect is possibly it’s probably not that high. And the Urban Institute paper acknowledges that there was a paper from Smo, Lu and Angrist, 2000, that finds smaller spillover effects, I’ll have to look at how what the magnitude of that is.
The general point is that there’s going to be some spillover benefit, or some benefit that’s wider than just the benefit to you, the benefit to the government through the taxpayers, through higher educated people paying more taxes. That’s difficult to measure, positive, but just very difficult to measure. Right.
So, what they say, in conclusion, is that; we can’t work it out. There’s a benefit to the state governments as a benefit to the public, we can’t really work it out. So, we can’t tell you whether, on average, it’s the state gets a return on investment.
Now, we can for Australia. There’s some good evidence in Australia that there is a return on investment, not just to the individual, but to the government as well, which I’ll go over a bit later. Before we move on to Australia. I just want to talk about the trend over time. There’s a lot of discussion about whether the college wage premium in the states, what they call the college wage premium, whether that has stagnated. And there’s a note that I’ll link to from Jack Salmon, who’s a research associate at Makeda Centre at George Mason University. So, there are some big names at George Mason people like Tyler Cowen, and he’s got a great podcast. And he’s one of those renaissance man, just talks about everything; brilliant guy, and also the host of Macro Musings, David Beckworth is there too, he’s at Makeda center.
And what Jack Salman writes is that he talks about; there’s been a stagnation in the college wage premium over the last 15 years. And the problem, and this is an issue for the future. So, generally, college has been a great investment in the States, but it’s becoming less, so as the cost of going to college has risen. So, what he’s saying is that this college wage premiums remained flat. So, the uplift you get in your earnings, but at the same time over that 15-year period, the cost of college has grown by more than 50%. So, the cost of college is just growing massively. And when I’m not sure why that is, but I mean, it could be, I guess it’s your input costs, isn’t it? It’s the cost of skilled labor to do the teaching. It’s the whole Bowmore cost disease thing that we know about.
Arturo Espinoza Bocangel 38:35
Inflation too.
Gene Tunny 38:37
I guess what they’re saying is that it’s higher in other sectors of the economy, it’s higher in higher education. And perhaps it’s you know, it’s sort of, I guess, the fancy facilities that they need to provide nowadays, the, the theatres and stadiums, etc.
He’s just highlighting that, look, there’s this issue, there’s this growing issue that it could mean that for many people, it doesn’t pay off. But generally, it’s been a good investment but your individual returns may differ from the average. So, if you’re looking at making the decision whether to go to college or not, it’s got to make sense for you.
Nowadays, I mean, I think there are a lot more there probably, a lot of opportunities to make money outside of university or college more than there were once upon a time. I mean, I’d still recommend people go to university, but when you think about all the opportunities; there are freelancing, opportunities to teach yourself via online courses, opportunities to then make money from freelancing or if you’re really good, and you’ve got a huge audience, you could become a YouTube star. I mean, that’s a very limited number of people though, so maybe that’s not a legitimate career, aspiration or strategy.
I mean, what do you think, Arturo, do you think generally University is a good idea?
Arturo Espinoza Bocangel 40:00
I think in general education, for example, there are some technical education also. If our society may have higher population, or highly educated population in relative terms is going to bring positive externalities. Or whole the society, I’ve seen that this is always education is, I think the best option.
Gene Tunny 40:38
Right? So, you’re talking about externalities. So, these are the external benefits beyond the returns to the individual. Are you talking about things like lower crime. I mean, what other things you’re talking about? Are there no cultural improvements? I don’t know. I mean, yeah, I guess there is a view that having a more educated population does have wider benefits than just to the individual. I mean, greater and more knowledgeable society, right? More informed public debate. So, we would hope that our political leaders make that decision.
Okay. I think that’s a good observation. So, before we wrap up, we might better cover the Australian evidence. The two studies; and I’ll link to them in the show notes, I found that are relevant to this is there’s a study by Deloitte Access Economics, and there’s one by the Grattan Institute. The Deloitte one was from 2016. And it found that on average, 52% of the observed differences in earnings between bachelor degree holders, and those without any post school education, can be attributed to qualification effects rather than demographics or innate ability. Okay, so they’re finding that, there’s some self-selection of high performing individuals into bachelor’s degrees. So, some people are more conscientious and productive are going to study, they’re going to do that anyway, rather than go into the workforce full time early. So, some of the difference in average earnings between bachelor degrees and people who don’t have them, that’s going to be due to the fact that, yeah, they’re just more conscientious or they’re harder working.
But then, what Deloitte saying is that they’ve done some econometric analysis, and they’ve concluded that half of that gap, or that difference, half of the higher earnings is due to having the bachelor degree, so, the university education.
Now, one thing I should have checked was, what are the data tell us about average earnings of bachelor’s versus not having any post school, I’ve got the figures over a lifetime, we’ll talk about later. But I have to look at that. But if you think about it, I mean, if you’re on minimum wage here in Australia, and that’s probably what you’d be on, if you don’t get a higher education degree, you would be getting maybe 40 to 50k, if you’re full time. Okay, so the national minimum wage is 812 60 per week. So, what does that equate to over the year? Yep, so that’s, that’s 42,255 over the year, so I was sort of in the ballpark, which is good. And if you think about it, if you get a university degree, and you graduate, and you’ll get in, if you get into a graduate position, then you’re going to be at least in that 55 to $60,000 range. And then as you progress through the career, you’ll get up to 80 or 100, or even higher. So, yeah, there’s definitely an average difference in the averages for people with bachelor’s and not with bachelors with no post school. So, I’ll put a link to ABS data on that so you can check that out. So, generally Deloitte find that it makes sense for individuals. It looks like it’s a good investment.
So, we might talk about the final study that we’re going to consider today; it’s from 2012, but it’s a very good study. I think the findings probably still are relevant today. And it’s by Andrew Norton, who was at Grattan Institute at the time. I know Andrew quite well. He used to be at Centre for independent studies, which I’ve had a lot to do with here in Australia. And Andrew in his analysis concludes that graduates do well out of higher education. They have attractive jobs above average pay and status. They take interesting courses and enjoy student life. And that’s what I was talking about before those non-financial benefits. And then given these large benefits and with the help student loan scheme in place, that’s at higher education loan program. Most subsidies are for courses that students would take anyway. Benefits greatly outweigh the costs for most students and the minority of graduates who don’t win through higher income never pay for their degrees as a result of the help scheme. In effects, today’s tuition subsidies redistribute income toward graduates at the expense of the general public, particularly those who do not go to university.
Okay, so the point of Andrew’s report back then was to argue that, people who go to university are doing incredibly well. So, therefore, the government should require them to contribute more of their income when they succeed later in life. And I think the government may have adjusted those repayments. I’ll have to check, but Andrew was essentially saying that back in 2012, the way that the policy settings were the rate of recovery of the money of this HELP loan, or the government wasn’t requiring you to pay enough of your education, there was there was a heavy subsidy. So, he’s saying they should cut that subsidy. That was back then. I mean, there’s still heavy subsidies now. But I haven’t seen this study replicated recently, just to see how extensive that is. There are big returns and he’s got these great data here, he’s got in one of the tables, table seven, median gross lifetime income by level of education. And let’s look at Niles; he’s got to split by male and female, it doesn’t have it for people, for everyone. So, year 12, if you get year 12, your median gross lifetime income is $1.7 million. But if you get a bachelor degree, it’s $2.8 million. So, the difference for a male between getting year 12, and a bachelor’s degree, if you get your bachelor’s degree, you earn $1.1 million; that’s Australian. So, if you’re in the States or somewhere else, just note that the Australian dollar sort of, averages around, I don’t know 75 US cents, okay.
And for women, the difference is $800,000. That’s going to be partly because many women take time out of the workforce because they have children, and they’re the primary carer for children, or for sick or disabled relatives or elderly relatives.
So, that’s good that Andrews got those stats in there. Just bear in mind, that’s 2012. So, those numbers would be inflated now, because you’d have to adjust for inflation since then.
One of the neat things that Andrew does is he calculates to what extent the government wins from having graduates because of their higher earnings and their higher tax paid. And this is his point that I think in Australia, because of the way our tax system works, it’s highly progressive. Then as people get higher education, they earn more, they become doctors or lawyers, or public servants, or economists or physiotherapist or whatever, then they’re paying more of their income in tax. And the government does extremely well out of that. And this is great. So, Andrew concludes it benefits. The net public financial benefits for the median graduate. Yeah, it’s strongly positive. Okay. So, for engineering, for example, you’ve got, you’ve got a net public financial benefit of $425,000. Over the lifetime, dentistry looks really good. If you’re a male dentist, you get; this is for the government net public financial benefits. So, it looks like it’s nearly 800 to 900,000 on that chart. Medicine, similarly. Law, a little bit lower, but still, you know, 700, 800,000. Commerce, bit over half a million.
Quite substantial returns to the government. So, that’s to the government from just your medium graduate. So, if you think about, well, then there are the ones above that, and there’ll be contributing even more than that. But then as you go down the scale, the amounts decrease, but even so, even for education or nursing graduates, it’s still a $200,000 net public financial benefit. It gets lower as you go to agriculture. For males, it looks like it’s 150,000. For females, if they’ve studied agriculture, I don’t know, 50 to 100,000. Humanities, sort of around 100,000. On net still positive.
The one field where there was a negative return and this is something that Andrew points out is performing arts. Performing arts graduates have a negative $40,000 net public financial benefit from studying. And he’s written that at least financially, the public would have been better off if the performing arts graduates never went to university. So, that is just going to reflect the types of people who study performing arts and then it’s going to be more creative people, and they’re going to be artists, and they’re going to have spills out of the workforce, or might be working in cafes, where they’re trying to get their big break. And it’s such a difficult thing to have a career in, really. I mean, it’s one of the things where, if you win, if you become Chris Hemsworth, or Margot Robbie, right, you’re going to be a superstar, you’re going to make millions of dollars, but most people who are in performing arts, they’re not in that league and so yeah. Okay, so that makes sense.
And then, Andrew cites some studies of the rate of return, the yield, the internal rate of return on education in Australia, from people like Jeff Borland and others, and they generally show that the decision to attend university is financially sound in Andrew’s words. So, high internal rates of return on education investment, Jeff Balland found 12% for both genders. 15% for males 17% for females.
There was another study by Daly, et al. So, Daly and others, 2006: males 15% females 12%. Right. Overall, big returns from the going to university. And, you know, even though more people have gone through university in recent decades, at the same time, you’ve had this sort of skill biassed technical change, you’ve had a greater demand for universities that these graduates at the same time. So, even though in the states it looks like the college wage premium has stagnated, you still do have reasonably good returns to higher education; you do still in Australia. I think it’s probably for the average person or the average person looking at going to university, it’s sensible. It’s financially sound. I mean, I would certainly recommend it. And particularly being a former university teacher, and still having a connection with the University of Queensland and in various different ways. I’m sure you probably would too, Arturo recommend? Anything we missed anything we should cover in a future episode on return-on-investment education?
Arturo Espinoza Bocangel 52:41
Probably, the gap between female and male return? Yes. It’s quite notorious. How Australian male are receiving more or higher wages than female?
Gene Tunny 52:57
Well, we’ve covered that gender or talked about gender pay gap in previous episodes. A lot of that gap can be explained by observable characteristics or the industry or occupation that people are in. But yeah, there is still a gap that you can’t explain, and hence, possibly could be attributable to discrimination of some kind, but it’s not the bulk of the gap, it’s a few percentage points, if I remember correctly. But yes, that is an issue that we could revisit in a future episode.
Okay, well, Arturo, if there’s nothing else, I think we better wrap up because we’ve gone for nearly an hour. And yeah, it’s been great chatting. So, thanks for joining me today.
Arturo Espinoza Bocangel 53:40
No, thank you, to you Gene for having me.
Gene Tunny 53:43
Very good. Thanks Arturo.
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app.
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Credits
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