Photo: Javier Capella. Source: US Navy
As millions of parents around the country face billions in tuition bills for the coming school year, it’s a question worth asking. The answer seems obvious: the financial benefits from college appear greater than ever. The earnings premium from a college diploma is now 73%: folks with undergraduate degrees earn 73% more, on average, than those who never went to college. This is up from 50% in the 1970s. Of course, your mileage may vary: engineering and computer science majors earn a lot more than folks study psychology or French.
But employers still pay a broad-based premium for workers with all kinds of different majors, and that premium has grown over time. The critical question, however, isn’t whether college pays, but why?
The simple, popular answer is that schools teach students useful job skills. In economic terms, colleges enhance human capital. These skills make us more productive and more valuable to employers. They can therefore be expected to pay more for educated workers. But what’s useful – in a hard-nosed business sense – about poetry or French, if you aren’t editing a poetry journal or working for Banque National de Paris? Most of the payoff for college comes from crossing the graduation finish line. Juniors who drop out don’t earn three-quarters of the college premium.
Source: Cleveland Fed
A degree is also a signaling device. An undergraduate degree from a competitive school sends a clear, concise message to potential employers that the applicant is diligent, intelligent, and able and willing to show up. Academic success is a strong predictor of worker productivity – and worker pay – precisely because many of the same skills that make students successful also make them good employees. It’s not that colleges don’t teach marketable skills. They do: learning literacy, math, computer skills, and how to work effectively in diverse groups are all important. But if businesses paid for the skills students learn, why do the students cheer when class is cancelled?
When I was in graduate school, we used to joke about the disconnect between our professors and the real world. We hypothetically constructed two courses of study: a six-year degree that included every course the professors thought we needed, and the six-month program that just had the course-content we would actually use. That gap – like the wage-gap between having a little college versus an undergraduate degree – is the degree of signaling embedded in the sheepskin effect.
Sheepskin Diploma from 1948. Photo: Lawrence Miller. Source: Wikimedia
Even in technical fields, like computer science, employers screen applicants based on where they went to school, but then hire them based on their demonstrated abilities. Interviewees are often given problem from the most popular textbooks, or put into paired programming situations where they solve a real-world problem. Companies like Dropbox and Twitter don’t just trust a CS degree from a top school, they need to be certain the person they hire can code.
There’s nothing wrong with college – except the costs, both in dollars and in time. As a society, we push more and more people into higher and higher levels of education. But most people don’t remember what they studied. The main effect isn’t better jobs or more skills, but a credentialing arms race, where you need an undergraduate degree just to interview for a job at a parking lot. For the individual, college pays – or rather, a college degree pays. For society, though, we need to seriously evaluate the various ways in which we create human capital: vocational education, military assignments, coding boot-camps, apprenticeships, and distance learning all should be considered viable alternatives to the residential undergraduate experience, which often costs more than a quarter of a million dollars.
Apprenticeship program. Photo: Laura Musikanski. Source: Morguefile
The novelist Grant Allen said to never let school get in the way of an education. We might add that we also shouldn’t let a degree serve as a proxy for ability. It’s an expensive mistake.
Douglas R. Tengdin, CFA
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