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Wednesday, August 01, 2007

Education and Success

A theme frequently visited by Larry Kudlow (of CNBC's Kudlow & Company fame) is contained in the following excerpt:
This is a point I keep making—that if you earn a college degree or better, the unemployment rate is 2 percent, whereas if you don’t graduate from high school it’s closer to 7 percent. Moreover, the wage gap between these groups is very significant and continues to grow.

Simply put, it pays to stay in school.
Does it pay to stay in school? After taking into consideration the cost of the additional education, opportunity costs, risk and discount factors, and personal preferences, and then comparing it to other investments (which also pay), I rather doubt it pays much, if any, on average. If it does pay to stay in school after such factors are considered, it points to a significant market failure which nobody has yet identified or explained. In other words, if it pays so well, why don't far more people do it, leading to increased supply of skilled labor with a corresponding reduction in skilled wages and a decreased supply of unskilled labor with a corresponding increase in wages until it all balanced out? You know, like any other market. In which case it wouldn't pay relatively better than any other investment once other factors are considered.

I agree that the correlation Kudlow points out is clear. Those who graduate from high school and college are more likely to be employed than those who don't and they're likely to make substantially more money as well. That extra money seems to more than cover direct educational costs and opportunity costs over the course of a lifetime.

However, correlation doesn't indicate causation. There's no direct evidence in Kudlow's statement regarding employment and education that staying in school causes a higher likelihood of employment or higher salaries.

There are many other factors that also play a role in attaining higher wages and success in general. For example, personal characteristics including intelligence, perseverance, intensity, focus, dedication, reliability, willingness to delay gratification, etc. is one such factor. I think that those individuals who possess such traits are more likely to be employed and with a higher wage than those who don't possess such qualities. In addition, it seems to me that those who have such traits are more likely to be able to finish high school and get into and finish college. In other words, I think that those traits are the fundamental causes of success (including higher rates of unemployment and wages), whereas a college degree is only a symptom of having the traits necessary for success.

Can I prove this? Nope. The relevant data is not available. I'm not even sure relevant data can be collected. For example, how exactly do you measure many of these traits?

Can anyone prove me wrong? Nope. The same relevant data is not available. This is just one of those superempirical moments when we simply need to bail on empirical analysis and take refuge in our belief systems. Kudlow believes that staying in school pays. I doubt that it pays all that much better than any other investment (on average). How about you?


Susan's Husband said...

I don't see a profit differential as indicating a market failure. It's like saying that because gold is more expensive than lead it's a market failure that alchemists don't turn lead in to gold. The differential may simply be that not everyone can successfully complete a useful college education.

As some who was a teaching assistant for a number of years, I encountered many students where obviously not going to graduate in the cirriculum no matter how hard or long they worked at it. Even if graduating college meant becoming an instant millionare, it still wouldn't pay for them to try because it would be wasted effort.

Bret said...

susan's husband wrote: "I encountered many students where obviously not going to graduate in the cirriculum no matter how hard or long they worked at it."

They wouldn't graduate from that curriculum at UIUC, but they could get through some curriculum somewhere and graduate. If there was enough demand because it paid to stay in school, new schools could cater to very marginal students.

You may be right on the profit differential versus market failure thing, but let me explain my reasoning in more detail to see what you think.

To start as simple as possible (maybe too simple), let's say that there is only one class of persons and there are only 2 career choices: either they can go to college and be programmers or they can not go to college and be bartenders. If lots of people choose not to go to college, then bar tenders are a dime a dozen and the college graduates will make a lot relative to bar tenders. If nearly everyone goes to college, then the demand and relative wages for bartenders will increase, making it less lucrative to bother going to college. Given these two choices and the relative number of programmers and bartenders I would expect this market to even out the number of programmers and bartenders such that the relative premium for programmers would just cover the cost (including risk and discount factors and opportunity costs) to become a programmer and earn that premium. In this simple example, if that wasn't the case, this would be a market failure.

I've extrapolated this across all classes of people with certain levels of ability and all possible career choices. I think that if everybody went to college, the demand for lower skilled tasks would rise relative to what college graduates make. Thus for any given level of ability, if it really "paid" to go to college when taking everything into account, people would simply do it and new colleges would open up to sate that demand if necessary. If they're not doing it, it's either a market failure or it doesn't really "pay" (which is another way of saying it doesn't provide adequate value, all things considered).

So what I think you're saying regarding the profit differential thing is that many more people can be bartenders than can be computer programmers. I agree. But here's my perspective. One class of people can either be low-end programmers if they go to college or bartenders if they don't. A class with more potential might be higher-end programmers if they go to college or if they don't attend college they might start as bartenders but end up managing and then owning the bar (or a bar).

I think the mistake many people (like Kudlow) make is that they think that if you don't go to college, you can't do anything but menial labor, even if you're very talented. Baloney! Bill Gates never graduated from college. One of my grandfathers dropped out of school after eighth grade but went on to be President of Detroit Steel.

Talented people make their own opportunities and will be successful whether or not they go to college, in my opinion. Contemplating my college friends, they would've all been successful whether or not they bothered going to college. Did it pay for them to go to college? Probably, and that's why they did it. Would it pay for someone else who chose not to go to college? I have to assume not, that's why they made that choice, a choice that probably reflects an efficient market.

Oroborous said...

Even if what you say is completely correct, it still might pay in other-than-financial ways to go to school, rather than to not.

For instance, there are many fields that require a certain credential, certification, or accreditation. But, once that requirement is satisfied, there are career paths open in those fields in which one can simply cruise, so that while such a person will rarely make it to the top, they'll spend their working lives making decent money for minimal effort.

Also, there's the network effect, which typically pays off much better among collage grads than among the blue-collar set.

Bret said...

oroborous wrote: " [going to college] still might pay in other-than-financial ways..."

I consider that part of the "pay". There are "other-than-financial" costs as well. Kudlow may use the strict definition of "pay" as being only financial.

oroborous also wrote: "For instance, there are many fields that require a certain credential, certification, or accreditation."

Actually, since those are monopoly rent-seeking entities, I generally do consider them to be market failures. So that is one area where staying in school unfairly does "pay".

Oroborous said...

They're only market failures to the extent that there isn't open enrollment for the courses or tests necessary to get licensed.

Otherwise, those are market successes; a means by which one can be fairly assured that one will receive value for money.

Examples are the Automotive Service Excellence certification, and Windows and Oracle certifications.
All are voluntary, and nobody without them are shut out of employment by gov't fiat, but they serve as a mark of distiction to potential employers or clients.

Bret said...

I agree that your examples are successes. I was more thinking about things like the AMA or the plumbers union coupled with required licensing for plumbers.