Sicilian, Paul

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Seidman Business ReviewVolume 19 | Issue 1 Article 121-1-2013The Economic Value of a College Degree:Evidence from Michigan and the NationPaul SicilianGrand Valley State UniversityFollow this and additional works at: http://scholarworks.gvsu.edu/sbrCopyright ©2013 by the authors. Seidman Business Review is reproduced electronically by ScholarWorks@GVSU. http://scholarworks.gvsu.edu/sbr?utm_source=scholarworks.gvsu.edu%2Fsbr%2Fvol19%2Fiss1%2F12&utm_medium=PDF&utm_campaign=PDFCoverPagesRecommended CitationSicilian, Paul (2013) "The Economic Value of a College Degree: Evidence from Michigan and the Nation," Seidman Business Review:Vol. 19: Iss. 1, Article 12.Available at: http://scholarworks.gvsu.edu/sbr/vol19/iss1/12Seidman Business Review  •  Winter 201330 The Economic Value of a College Degree:  Evidence from Michigan and the NationPaul Sicilian, Ph.D., Department of EconomicsSeidman College of BusinessIntroductionMany people are questioning the value of a college education. Several recent news stories have highlighted rates of unemployment and “underemployment” for recent graduates, while rising college tuition rates are a concern for families and government policy-makers alike. The value of degrees in the “liberal arts,” in particular, is questioned because of the belief that these degrees do not lead to gainful employment. Since Michigan is a manufacturing-based economy with a relatively unionized workforce (in 2011, 17.5 percent of the Michigan workers—public and private—were union members, the 5th highest percentage in the country1), one might think that the economic returns to a college education would be smaller in Michigan as compared to the nation. This paper looks at the evidence concerning these claims and finds that a college education remains a good investment. While there are significant differences in earnings by college major, all college degrees offer the potential for life-time earnings significantly greater than the life-time earnings possible with only a high school education. Moreover, the evidence indicates that a college education offers several types of non-economic benefits that mean a higher quality of life for those who undertake the investment.Costs of a College EducationThe President’s Council, State Universities of Michigan, provides information on tuition and fees for Michigan public universities.2 Undergraduate tuition and fees for 2012–2013 ranged from $12,994 (University of Michigan) to $8,120 (Saginaw Valley State University). Tuition and fees for West Michigan universities include $10,780 at Grand Valley State University, $10,710 at Ferris State University and $10,282 at Western Michigan University. These costs compare to a national median tuition and fees of $16,488 for in-state public institutions (The College Board, 2011).These “sticker prices,” however, overstate average costs faced by many students because of the availability of financial aid. In 2011–2012 undergraduate students received on average $6,539 in grant aid and an additional $1,009 in tax credits, deductions and Work-Study aid (The College Board 2011). In addition to these grants, the average federal student loan was $4,907. Because of such aid, the net tuition at Michigan public universities in recent years is less than 50 percent of the tuition and fees listed above (Farrell, et al., 2011).Earnings and Educational Attainment in MichiganWhile a college education is expensive, earnings differences by education are large. Table 1 presents median annual earnings for Michigan and for the nation by educational attainment for full-time workers in 2011.4 Median high school earnings in Michigan are only 56.7 percent of median college earnings.Human Capital Theory offers an explanation for these wage differentials. Basic economic models of labor markets suggest that earnings are determined by worker productivity. Individuals can increase their productivity by investing in “human capital” in much the same way a business can invest in physical capital. Formal education is one way to build human capital. Figure 1 presents a three-year moving average of the national college-to high school earnings ratio from 1976 to 2011, which shows that the college earnings premium has grown significantly over the past 30 years. Michigan earnings shows a similar pattern, although, the college premium for men has fallen from its peak in 2007 more in Michigan than for the nation overall. These annual earnings differences translate to life-time earnings premia for college-educated workers that swamp the costs of college. In fact, over their career, college-educated workers will, on average, earn well over $1,000,000 more than high school workers.What of the belief that certain college majors—the traditional liberal arts and humanities degrees—are not worth the cost? The college earnings premium may be driven, for example, by Technology and Engineering majors. Figure 2 shows life-time earnings by a variety of majors. These statistics are derived from the 2009 and 2010 American Community Surveys (ACS). 1 Source: www.unionstats.com2 “Report On Tuition And Fees 2012–2013.” http://www.pcsum.org/Portals/0/docs/Tuition%20and%20Fees%202012-2013.pdf3 I don’t include room and board costs as these costs exist for non-college individuals and well as for those attending college.4 For information on the CPS, see http://www.bls.gov/cps/. Individuals were considered to be working full time if they worked 50 or more weeks in the year and 38 or more hours per week. Median earnings are for workers between the ages of 22 and 70. CPS data retrieved from http://www.ipums.org.Michigan NationCollege $59,999.00 $54,227.00High School $34,000.00 $33,000.00Source: Author’s calculations using March 2012 CPSTable 1: Median Annual Earning By Education, 2011www.gvsu.edu/business 31 1.2001.3001.4001.5001.6001.7001.80020102005200019951990198519801975Figure 1: College to High School Annual Earnings RatioMen and Women between the Ages 22 and 70Men’s Ratio Women’s RatioAs many suspect, liberal arts and humanities majors have the lowest earnings, yet even men and women with these majors have life-time earnings in excess of $1,000,000 more than men and women with a high school education.Unemployment and Education in Michigan Historically, college graduates have experienced significantly lower rates of unemployment compared to those with a high school education (between 1992 and 2012, the average national unemployment rate for high school graduates 25 years and over was 5.2 percent as compared to 2.8 percent for college graduates). Nonetheless, there is concern that recent college graduates suffer from high unemployment or “underemployment”— that is, they are in jobs that do not require college-level skills.It is a mistake to focus only on short-run outcomes, particularly at a time when the labor market is in arguably the worst condition since the Great Depression. One could ask if the current unemployment rate of recent graduates is temporary — a standard business cycle phenomenon—or if the labor market has fundamentally changed for the worse for college graduates. While this cannot be answered with certainty, one way to shed light on this question is to consider the experiences of young college graduates during previous recessions. In particular, the double recession of the early 1980s was, at that time, the worst recession since the Great Depression. Figure 3 presents unemployment rates in Michigan for recent college graduates (individuals with a college degree between the ages of 22 and 26) derived from the March CPS for the years 1980–1985 and 2007–2012. This allows us to see how the unemployment rate evolved 5 Since 1984, the unemployment rate for college graduates older than 26 averaged 2.95 percent. Thus, those who graduated from college during the early 1980s recession, have experienced very low unemployment rates for most of their careers, despite graduating into a deep recession. The average unemployment rate for high school graduates over 26 years old over this same period was 6 percent.$0.00$500,000.00$1,000,000.00$1,500,000.00$2,000,000.00$2,500,000.00$3,000,000.00$3,500,000.00$4,000,000.00 Economics Engineering Business SocialSciencesLib. Arts &HumanitiesMath &StatisticsPhysicalSciencesFigure 2: Life Time Earnings for Men and Womenby Education and MajorLifeSciencesWomen                MenHighSchoolSeidman Business Review  •  Winter 201332 before and after the 1980s recession and to compare the pattern to the recent changes in unemployment rates. Two things stand out. First, the variation in the unemployment rate over the most recent recession is similar to that from the early 1980s.5 Second, the unemployment rate for young workers with only a high school education has been as much as three times the unemployment rate for young college-educated workers. Apparently, then, a college degree is “needed” for many jobs. The unemployment rate can be misleading as it can fall either because more people are finding employment or because more people are dropping out of the labor force. For young workers in Michigan, it is a combination of both things — labor force participation rates for young college graduates fell from 89 percent in 2007 to only 78 percent in 2011. Young high school graduates exhibited a smaller decline-from 78 percent in 2007 to 74 percent in 2011. Still, by 2011 the unemployment rate had dropped significantly and there is no reason to expect that unemployment rates for college-educated workers in Michigan will not return to their historically low values, even with increasing labor force participation rates as the economy improves. In addition to the economic benefits of college, there are other important “returns” to education. For example, research finds that maternal education improves birth outcomes (Currie and Moretti 2003). Also recent trends show that college-educated couples are more apt to get and stay married (Isen and Stevenson 2010). Research even finds that life expectancy is greater for more educated individuals and that the “education gap” in life expectancy is growing (Meara, et al., 2008).ConclusionIt is certainly true that college is expensive and that the costs are rising quickly. Nonetheless, the notion that a college education is not worth the cost is misguided. This paper has demonstrated that college graduates in Michigan as well as in the rest of the country enjoy large financial and non-financial benefits relative to those with a high school education — large enough to easily offset the costs of college. ■ReferencesCurrie, Janet and Enrico Morreti. 2003. Mother’s education and the intergenerational transmission of human capital: Evidence from college openings. Quarterly Journal of Economics 120(3): 1003–1030.Farrell, Patricia L., Ruth Kallio, Chris Scanlon and Reese Havlatka. 2011. Michigan resident undergraduate net tuition: FY2007-FY2010. Retrieved October 2012 from http://www.pcsum.org/Portals/0/docs/NetTuitionStudy%202011.pdf.Isen, Adam and Betsey Stevenson. 2010. Women’s education and family behavior: Trends in marriage, divorce and fertility. National Bureau of Economic Research Working Paper No. 15725.Meara, Ellen, Seth Richards and David M. Cutler. 2008. The gap gets bigger: Changes in mortality and life expectancy, by education, 1981–2000. Health Affairs 27(2): 350–60.Presidents Council State Universities of Michigan. Report on tuition and fees 2012–2013. Retrieved October 20, 2012 from http://www.pcsum.org/Portals/0/docs/Tuition%20and%20Fees%202012-2013.pdf. The College Board. 2011. Trends in Student Aid 2011. Retrieved October 20, 2012 from http://trends.collegeboard.org/downloads/Student_Aid_2011.pdf 23.1%20.0%24.0%18.7%16.1%11.8%14.3%21.8%17.3%13.5%5.7%2.8%9.6%7.5%9.9% 9.6%5.3%7.9%9.0%13.1%4.0%0.0000.0500.1000.1500.2000.2500.3001980 1981 1982 1983 1984 1985 2007 2008 2009 2010 2011Figure 3: Michigan Unemployment Rates over Two RecessionsYoung WorkersHigh School                   College13.0%

The Economic Value of a College Degree: Evidence from Michigan and the Nation

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The Economic Value of a College Degree: Evidence from Michigan and the Nation

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