Will college turn you into a money-printing machine? Or, using more precise language, how much more money will you earn if you go to college?
As a simplified initial approach to answering that question, here’s the US Census Bureau’s data on average wage by educational attainment:
| Highest Educational Attainment | Average Earnings | Earnings Compared With High School Graduate |
|---|---|---|
| High School Graduate | $46,698 | 100% |
| Associate Degree | $57,002 | 122% |
| Bachelor's Degree | $82,508 | 177% |
It’s worth noting those numbers are averaged across adults of all ages, so they’re probably not representative of how much you’ll earn in the early years of your career. To correct for that limitation, let’s look at the same data for only adults between 25 and 29 years of age:
| Highest Educational Attainment | Average Earnings | Earnings Compared With High School Graduate |
|---|---|---|
| High School Graduate | $38,724 | 100% |
| Associate Degree | $45,300 | 117% |
| Bachelor's Degree | $62,707 | 162% |
That’s a bit better, but it’s still not perfect. Most critically, it’s not broken out by the factor we care about: college major. I regret to admit that we won’t be able to get earnings by major, at least not any numbers I would trust. It’s undoubtedly true that some majors improve earning potential more than others, but we shouldn’t assume that the outcome associated with any specific major was caused by the major: Maybe students that choose lucrative majors are driven to pursue money over other benefits, for example. Even if they hadn’t chosen a lucrative major, they still may have been highly motivated to pursue high-paying jobs after graduation. Most students aren’t willing to let academic researchers randomly assign them a major to see how it works out, so we may never have definitive proof of the earnings benefits of any specific major.
In all honesty, the same limitation holds true with our numbers above. I think it’d be worth correcting them as much as possible, even if it only gives us a sense of the earnings benefit of college on average (and not for a specific major). So, let’s work through a few of the corrections:
Ability Bias
Maybe the people who graduate from college would have made more money than average, even without the extra education. (Maybe they’re smarter, more driven, or come from advantageous backgrounds, for example.) In the research literature, this is called ability bias, and it’s important we factor it in to get a fair estimate of the salary benefit of college.
So, does college cause the increase in earnings, or would the students have been higher-earners even without attending? Economists have studied this question, and their answer is: a bit of both. In his book, The Case Against Education*, Economist Bryan Caplan estimates ability bias makes up 25%-45% of the total difference in earnings. (He calls 25% a cautious estimate and 45% a reasonable estimate.) The remainder, 55%-75%, is attributable to the effect of the additional schooling. So, there are real wage boosts from a college degree, although they’re smaller than they first appear.
Sheepskin Effect
At what point during college is earning potential actually increased? Is it about how many classes you’ve taken, how many semesters you’ve survived, or is it all about reaching graduation day? As it turns out, most of the increase in earnings comes from the diploma itself rather than the years of schooling. After accounting for ability bias and other extraneous factors, Caplan summarized the results as follows:
| Education | Effect on Earnings |
|---|---|
| Each Additional Year of Education | +4.2% |
| High School Diploma | +32.0% |
| Associate Degree | +10.4% |
| Bachelor's Degree | +29.8% |
So, let’s be clear about what those results mean. Each additional year of education, on average, gives a 4.2% bump to earnings. That sounds pretty good, until you hear the diploma itself gives a 29.8% bump. If you only complete half of a college degree, you shouldn’t expect half of the earnings benefit; while you can expect a small benefit (those 4.2% bumps each year), you’ll miss out on the big salary boost of graduating. And these results are all after correcting for ability bias, so they represent a fair assessment of the actual benefit an individual will get, on average.
So, the salary benefits of college are heavily end-loaded. There’s a huge difference, in terms of earning potential, between almost finishing and completely finishing. Because diplomas were once commonly printed on sheepskin, this is called the sheepskin effect. The TL;DR is getting a diploma is critical if you want the earnings boost of college.
Education-Occupation Mismatch Penalty
The final factor we’ll consider is the education-occupation mismatch penalty. Breaking down that fancy name into comprehensible components, it’s how much less you earn (“penalty”) when your major and your job (“education-occupation”) aren’t a good fit for each other (“mismatch”). With that in mind, what can we say about the mismatch penalty? Based on a paper by Professor John Robst of the University of South Florida**, there are a few factors worth our attention:
Size of Penalty
The size of the mismatch penalty varies widely across college majors. According to Robst, majors that fit into our conception of career prep tend to have the most severe mismatch penalties:
Individuals who majored in business management, engineering, the health professions, computer science, or law all face more than 20% wage penalties for working outside the field of study. The wage effects are insignificant in the liberal arts and are statistically significant but small in the social sciences and education. Such results support the hypothesis that the wage effects from mismatch are greater in fields that teach occupation specific skills. [edited for clarity]
In retrospect, his conclusions don’t seem that surprising. The specific skills involved in preparing for one career may not transfer well to other careers, which means the value-generating abilities of those skills won’t transfer either. And career prep majors tend to lead to higher salaries than would otherwise be possible, so it makes sense that switching careers after graduating could lead to lower wages. I’d guess that choosing a career prep major and then switching careers would lead to lower salaries than choosing a more generalized path (such as self-improvement) from the start, but that’s just a hunch.
Frequency of Mismatch
Robst also notes the frequency of mismatch varies widely by major. Career prep majors tend to lead to mismatch less often than self-improvement majors. That makes sense, since career prep majors are designed for a specific career and self-improvement majors are not. With that said, though, it’s worth noting that mismatch is common across the board: “Forty-five percent of workers report that their job is only partially related or not related to their field of study.” Those are big numbers, so be mindful that a mismatch (and the accompanying penalty) could happen to you too.
Robst concludes:
Before choosing a major that focuses on occupation specific skills, students should be advised to make sure it is what they wish to pursue in their career. The cost to changing careers after getting the degree can be high.
Where Does the Earnings Increase Come From?
Our conclusion for the Learning section was that college students don’t learn much on average (in the sense of type 3 learning), and yet obtaining a college degree leads to a substantial increase in average earnings. Where does that increase come from?
According to Caplan, up to 80% of it comes from what the degree says about you: A college degree serves as a signal to employers that you have what they’re looking for. In the difficult business of choosing who to hire, having a degree means you were deemed qualified by a university admissions committee, were able to do well in your classes, and were able to make it to graduation day. That’s a strong signal to employers that you’d be a good employee for their company, and that’s also why obtaining a physical diploma has a larger impact on earnings than the years of education necessary to obtain it.
It’s also worth noting that we’ve been ignoring the value of job-specific competency and credentials. While those do matter, they depend too much on the particular major to go into detail here. Just remember that the salary you’ll be able to obtain after graduating will depend on numerous factors, including your skills, credentials, network, and interviewing skills.
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*Most of the points we develop in the Salary section come straight from Caplan’s book. The book aims to lay out a compelling case for why higher education should receive less government funding, and it does it by showing (i) there are real gains in earnings from college, (ii) a majority of the gains are attributable to what the degree says about you (signaling desirable traits to employers) rather than anything related to learning, (iii) the rise of higher education is in some ways an educational arms race, and (iv) we should diffuse the arms race by decreasing government funding for higher education. I don’t endorse all his arguments and conclusions, but I do stand by the quality of his work. (return to section)
**Robst, John. “Education and Job Match: The Relatedness of College Major and Work.” Economics of Education Review, vol. 26, no. 4, Aug. 2007, pp. 397–407. (return to section)