The case that education pays is often made by compare the income of people who graduated against the people who did not. The result is compelling:
(Source: U.S. Bureau of Labor Statistics)
But there are numerous problems with such naive statistical analysis:
- Kids from wealthy families are much more likely to attend college. Moreover, we expect kids with wealthy parents to earn more than their peers irrespective of their education. So you have to compare the income of individuals with similar backgrounds.
- While I have apparently the same economic background of many of my peers, I pursued a Ph.D. because I was ambitious. Meanwhile, ambition is probably a great predictor for income, irrespective of your level of education. This personal drive is difficult to measure statistically, but you should at least compare individuals with similar expression of ambition (such as grades in high school).
- Even with the same ambition and background, kids have different genetic material. Thus, not only do we want to compare kids with the same background, and the same internal drive, but we must also compare individuals with similar genes.
- Is it fair to compare the yearly salary of a lawyer who has been working 60 hours a week, sacrificing his family and personal life, with that of a secretary working 40 hours a week? Minimally, you should compare the hourly rate.
- Going to college is costly, both in a loss of potential income and in tuition. The cost of the education must be deducted from future income. This explains why earning a Ph.D. is usually a bad financial investment.
Nevertheless, the historical value of education as an investment has been great, even though most naive studies overestimate its value.
But one critical error remains: Can you predict the future based on the past, by naively assuming that the past will be like the future? My bank still claims in its brochures that I can expect yearly returns of 8% on my investments. They have nice plots showing how much investing a little bit right now is enough to become a millionnaire in 30 years. And indeed, the annual return on investment from 1950 to today is around 7%. So anyone who invested massively in the 1950s is probably wealthy right now. But the return on investment in the first decade on the twenty first century has been negative. Some people have made a fortune with their investments lately, but most people have lost money! Is it safe to predict that, eventually, the 1950s will come back? Nobody knows.
Maybe the job market is different? Maybe the market for young college graduates is relatively static and easy to predict? No. The number of university graduates has doubled in the West since 1990, and tripled in Asia. We are undergoing a massive transformation. Brown et al. (2008) warn us that the fast expanding supply of highly trained graduates, both locally and worldwide, will soon push the wages down:
Investment in high skills will not create the high skilled, high waged economy of the future.
(…) the competition for good, middle class jobs is now a worldwide competition—an auction for cut-priced brainpower—fueled by an explosion of higher education across the world and a fundamental power shift in favor of corporate bosses and emerging economies such as China and India. These drivers of the new global high-skill, low-wage workforce threaten the livelihoods of millions of American workers and their families. Fighting for a dwindling supply of good jobs will compel Americans to devote more time, money and effort to set themselves apart in a bare-knuckle competition that will leave many disappointed.
With the financial market, the solution is to change our expectations: you risk becoming very unhappy if you expect a rate of return of 8%. Similarly, I think we will soon need to change our expectations regarding degrees. More and more smart graduates will be unemployed, or underemployed. They will need to work long hours to keep lesser jobs. The college degree may become merely one of the assets a brilliant kid may use to succeed.