Friday Chart(s): The Driver of the College Wage Premium

IT is pretty much expected that soon to be graduating high school seniors will be on their way to college in the fall.  Most suggest that this is the desired path to higher incomes and more desirable jobs than their non-degree holder counterparts.  The gap in pay between those with a degree and those without is commonly referred to as the college wage premium.  In a recent piece in Slate, re-published in the BDN earlier this month, Allison Griswold writes regarding a recent San Francisco Fed study on the college wage premium:

Using U.S. survey data on income, the Fed study finds that a college student who pays $21,200 or less in annual tuition (some 90 percent of students at public four-year colleges and 20 percent of those at private nonprofit institutions) can expect to recoup that investment by age 38. After that, the extra income they make from their earnings premium is a net gain. “Tuition amounts lower than our estimate make going to college strictly better in terms of earnings than not going to college,” the study’s authors write.

And the authors of the study conclude that:

If we conservatively assume that the annual premium stays around $28,650, which is the premium 20 years after high school graduation for graduates in the 1990s–2000s, and accrues until the Social Security normal retirement age of 67, the college graduate would have made about $830,800 more than the high school graduate. These extra earnings can be spent, saved, or reinvested to pay for the college tuition of the graduate’s children.

And sure enough, the college wage premium exists and is still growing.  The following is a chart from the Cleveland Fed showing the rise in the college wage premium:

However, while one might conclude that the above chart makes the decision to attend college a foregone conclusion, the college wage premium is a misleading metric to use when making the decision to invest 4 years and several thousand dollars on a education.  First, as Griswold notes:

Of course, to say that college is always worth what it costs oversimplifies the issue. The college-grad earnings premium has grown recently more because wages for high school grads have stagnated than because pay for college grads is on the rise.

The reason Griswold notes for the rise in the college wage premium is often ignored, but there is another component to rise in the wage premium that is almost never discussed. As Jonathan James at the Cleveland Fed noted two years ago, research on wages for college graduates can be misleading because such research often lumps together those with just a 4-year college degree, and those with a 4-year college degree plus a graduate degree:

The standard assessment of the college wage premium is somewhat misleading because counted among four-year degree holders are those who also have an advanced degree. Including these individuals in the analysis may overstate these returns, much in the same way that including high school dropouts in the high school graduate pool would.

To study the influence of including advanced degrees in the college premium calculation, figure 2 plots the trend in the advanced degree premium, which is the ratio of median wages for those who hold a four-year degree and an advanced degree (6 plus years of college, a master’s degree, professional degree, or PhD) over those with only a bachelor’s degree. Looking from 1977 to the present, advanced degree earners have experienced growth in wages over and above those with only a four-year degree, from around 20 percent in the early 1980s to around 30 percent today.

With a graduate degree comes even more costs (both opportunity costs in losing a few more years in the work place to attain another degree, and the financial cost of attending school), costs which do not often get included in the calculations that show college still has a positive return on investment.   In other words, to suggest that college still has a positive return on investment (that gains in wages will offset costs of attending), research takes the wages of college grads, which often includes those with graduate degrees, and compares that against costs, which often does not include the costs of graduate degrees.

This is what the San Francisco Fed study does (at least, there is nothing in the study to suggest the authors disaggregated between 4-year degree holders only, and 4-year degree holders plus a graduate degree).  As a result, the $800,000 figure calculated in the study is at best questionable, and any conclusions derived therefrom–such as the financial benefit (to the tune of $800,000) of attending college–are also questionable.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.