WARNING: This Degree May Make You No Better Off Financially

Economics dictates how the world works. I didn’t learn this from my father, who is an academic economist, or from my undergraduate schooling in economics, or even from my first year of graduate studies in economics. Rather, I learned this from simply being alive. In both a theoretical and practical sense, economics is the study of scarcity and nothing in life is immune to the forces of economics, including higher education.

In the classroom, I’ve engaged in debates about what makes something valuable and what ought to be valued. There is, however, one thing that I’ve never heard discussed in an economics classroom: is higher education worth it? Or, in economic parlance, do the benefits of higher education outweigh the costs?

This is a tricky question, however, because I think there is a difference between ‘schooling’ and ‘education’ that is oft ignored in the discourse around this topic. ‘Schooling’ is largely about garnering credentials and ‘education’ is largely about learning; schooling is a ‘results oriented’ process and education is a ‘process oriented’ process. Sometimes there is some overlap between the two, but not always.

In economically positive terms, we live in a society in which schooling is valued more than education is valued. This isn’t necessarily wrong, it’s just how things work in a highly specialized economy. I think it’s important to acknowledge this point when talking about the distinctions between schooling and education. If one wants to increase their chances of financial success in a highly specialized global economy, then credentials don’t hurt. If one wants to increase their chances of being a decent human-being than getting an education won’t hurt either.

In a society that largely values financial success, it’s not surprising to learn that the number one reason most people choose to attend college in modern times, then, is because they believe that having college credentials will increase their lifetime earning potential. In fact, high school students are inundated with this message and with the statistical evidence supporting it.

It’s certainly true that, on average, those with college degrees earn more than those without degrees. Average, however, can be a misleading term. Psychological research consistently shows us that, in general, people overestimate their own abilities when compared to the average because we look at ourselves in what UVA psychology professor, Jonathan Haidt, calls a “rose-colored mirror”.

As any statistician will quickly notice, some graduates will earn significantly more due to their degrees and for some it will not make a difference. This wouldn’t be problem if a financial return weren’t necessarily expected; however, most people expect a financial return on their education investment. Somewhere along the way, we forgot to tell young people that twelve percent of mail carriers have an undergraduate degree. There is nothing wrong with being a mail carrier with a college degree in the slightest, but it would be somewhat sad to learn that many of these mail carriers thought their degree would improve their financial prospects.

For most young people, it’s fairly evident that most of the best paying jobs in today’s economy require some form of schooling credentials. What’s not always tacitly understood is what makes those credentials valuable or the ruthless competition that occurs to get those jobs. As any economist will tell you, the important thing to note about credentials is that they become increasingly valuable as a signaling mechanism when they are scarce. When only a few people have college degrees in a job market, they stand out to potential employers. What happens, however, to the signaling mechanism when everyone graduates from college? The answer is simple: the degree becomes less valuable as a signal if everyone has one or can easily attain one. Employers must find another way to find the best candidates.

In today’s economy, many people are frustrated with a system in which they apparently didn’t fully understand. We’ve told our young people that schooling will help them make more money over the course of their life and most of them go to college with an ingrained belief that a college degree will help earn them more money over their lifetime. They are thus disappointed to find out that this isn’t always true. By telling lies, we’ve inflated their expectations into a bubble that is bound to burst with disappointment.

There is some good news, however, for those who want to drop out of the credentials arms-race. If one has ambitions to pursue a career or entrepreneurial dreams that don’t require credentials they can still school themselves at a fraction of the cost. It has never been easier and cheaper to become schooled if you live in a developed country with access to the Internet. A financially expensive formal schooling isn’t necessary when there is a vast amount of technical knowledge that can be consumed online and at libraries for free. This isn’t devaluing the hard fought knowledge that is won in academia, but merely helping to share it with people who may not otherwise be able to afford it.

Higher education was never meant for everyone and when push comes to shove, for many people the financial costs of school simply outweigh the financial benefits. This should not be kept a secret. We should stop lying to high school kids and pretending that this reality doesn’t exist. Colleges and universities should also try to drive this point home. WARNING: This degree may make you no better off financially.

I’m sure many people on the business side of academia scoff at this idea because it would decrease enrollment and thus decrease the institution’s bottom-line. The reality is that this is true, but it is also necessary. Schooling is a business, but education shouldn’t be.

I believe that those who recognize the non-financial value in a formal education will analyze their decision in non-financial terms and move onto higher education regardless. Alas, I think these are the exact kind of kids we want moving on into the higher education system anyway, not the ones who are simply money hungry.


7 Comments on “WARNING: This Degree May Make You No Better Off Financially”

  1. Kris Winn says:

    Great article, Greg. 

    Social Workers, for example, make less than the average Firefighter and had to earn a four year degree in order to do so. There are a multitude of factors that determine financial success, and while I feel a college education is an outstanding supplement, it is far from a determinant.

    As soon as I get some change, I’ll be back to buy you a cup of coffee.


  2. Tanya says:

    Another irony is that having a degree is not always an indication of competence. Many high-school graduates with only “life experience” and a motivation to educate themselves are just as capable, if not more so in some cases, to perform better at certain jobs than graduate students with four year degrees. 

  3. Justin W says:

    Even-handed as usual, Greg, well done.


    The hard part about evaluating the return on schooling is
    that we can’t do any controlled studies. The people who have degrees clearly
    have better outcomes, but what’s the marginal effect of the degree? Like you, I’m
    guessing that for most degrees and for most people, it ain’t much (or may even
    be significantly negative). I’m also quite sure that the marginal value of a
    degree *right now* is going to be considerably less than whatever it was in the
    past, precisely because of what you said about scarcity.


    So the interesting question you raise is what, practically,
    can we do about this, because the average person seems to have some pretty
    seriously misguided notions about what they’re getting into when they enter a
    degree program (feels eerily similar to the housing thing, doesn’t it?).


    Cigarette-like warning labels is one idea. I’ll toss out
    another, more perverse one: A credit-score like assessment of the likelihood
    that schooling will be financially valuable to you, personally. I’d bet that
    given certain variables we can pretty creepily accurately predict the
    likelihood that someone will (a) manage to graduate, and (b) conditional on
    that, have their degree be worth a damn.


    That feels a little morally deviant, doesn’t it?, giving
    someone a raw number of what amounts to something like their future “success”
    probability? Maybe even more damning than the ethics is the fact that it
    probably wouldn’t change behavior much, simply because people tend not to be
    terribly convinced by such numbers.


    And so I come back around to the cigarette-like warning
    labels, but not just a textual statement, we need to show them graphic image of
    a mail carrier (or whatever) looking very sad and hopeless holding his diploma.
    (I say this in jest, sort of.)


    Here’s another layer I’ll add: Probably a large portion of those
    degree-holding mail carriers are actually quite satisfied with their decision
    to get a degree, simply because we, as humans, tend to find ways to be
    satisfied with our decisions. Point being that I’m not sure how important being
    rational about this decision is if what we really care about is something like “satisfaction
    with decisions.”

  4. […] ought to provide us. I’ve shared some of my thoughts on education before: here, here, and here. Education is not immune to economic analysis, but, before running a cost-benefit analysis, […]

  5. […] to burst? A while back, I wrote two controversial posts about the value of higher education (“WARNING: This Degree May Make You No Better Off Financially” and “Is Higher Education Worth It?“). Essentially, I argued that many types of […]

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