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The Financial Value of a University Degree

I’ve read quite a few articles about the value of a degree. Most of them come from the US where the combination of increasing tuition fees and uncertain job market makes a degree seem like a risky investment. I think that most analysis of the value of a degree are missing some important points.

The Value of Money at Different Times

The value of money is different at various stages of your life. The impression that I get is that when a married couple have their house fully paid off and they either don’t/won’t have children or their children are old enough to leave home the amount of money that they earn seems to matter a lot less. Doing a university degree involves 3 or 4 years not earning money (or more if doing post-graduate studies), which is usually starting at the age of 18. Effectively getting a degree involves giving up some money while young for the opportunity to earn more when older. Any analysis based on directly comparing the money spent on the degree to the amount of financial return without considering when money is needed is not very useful.

I think that a reasonable analysis would exclude income earned after the age of about 45. By that age most people have either achieved a solid financial position and learned to live within their means or messed up their finances so badly that they won’t live long enough to recover.

A Degree as a Signal

The Wikipedia page on economic signalling gives education as an example of a signal. A signal in this case means something that doesn’t inherently mean anything but which signifies something else. So completing a degree doesn’t necessarily mean that you learned anything relevant to work, but if you are able to do it then it means that you can probably also do things which are economically useful for an employer. This raises the question of how else one might signal their ability to work. One obvious answer is by working, someone who has remained steadily employed for 3 or 4 years has demonstrated their ability to work reliably and get along with other people which should be at least as useful as a signal.

It’s Not Only the Degree

Most analysis seem to compare average income of people with degrees with the average of income with people who didn’t attend university. That is based on the assumption that the degree was the only difference.

When I was young my parents spent a moderate amount of money on a full set of paper encyclopedias (about 2 meters of shelf space). I’m sure that this gave me some educational benefit as they intended, and it was something that was apparently quite rare – I don’t recall seeing a full encyclopedia in anyone else’s house before the Wikireader [1].

My parents also bought me quite a lot of computer gear (back when hardware was really expensive), were always available to drive me to computer users’ group meetings etc, and did everything else that seemed likely to have an educational benefit. The value of such learning opportunities is significant.

I think that almost everyone who had similar learning opportunities to me when they were young will probably have experienced similar support and pressure to attend university. I also think that almost everyone who receives such opportunities will be able to earn more than the median income even if they don’t attend university.

To a large extent people who are going to be successful attend university. A university degree doesn’t make anyone successful if they couldn’t succeed without a degree. There are some careers that just aren’t options if you don’t have a relevant degree (such as medicine and law). But I believe that anyone who is capable of completing a difficult course such as medicine or law (or any other career that has legal requirements for a degree) is capable of being successful without a degree in many other fields. So comparing the wages of a doctor or a lawyer to an average person doesn’t make sense, it makes more sense to try and compare their wages to someone of similar skill who didn’t have such a qualification.

Conclusion

It seems to me that the question is, of the people who had great learning opportunities when they were young and who wanted to succeed, would they have earned much less if they hadn’t attended university?

The next question is, of the people who might earn significantly less without getting a degree, would that salary difference really have mattered, or would it just be a matter of earning some luxury money when they are too old to really need it?

5 comments to The Financial Value of a University Degree

  • Mark

    Limiting this discussion to financial aspects is dangerous. It risks dehumanising a choice that should be about so much more!

    People deliberately make choices that traditional economists have no explanation for. What about intellectual curiosity or helping people for example? Why did friends of mine choose to study archaeology, or the piano?

    I am happy to live in a country where high quality education in the field of your choice is virtually free.

    I am shocked by the cruelty of educational structures that don’t allow people this choice, or only in exchange for cruel financial sacrifice.

    Look at the recent dismantling of this pillar of civilisation in Canada, for example, or in the UK.

    Your article make several interesting points, but focusing on financial aspects only is dangerous!

  • aaa

    Interesting…

    I come from a country where some some of your assumptions are false: Brazil.

    Here, there are universities that offer some courses at the night, so you can still work and study (that doesn’t mean it will be easy…). They’re usually courses like Business, Accountability and Law, not stuff like Medicine.

    Here, we also have public universities: they are owned by the government, so you don’t have to pay anything to join them. To join a public university you have to compete with other people on a test: the people with the best grades join the university. Also, public universities are usually considered the “best universities” here for a big number of reasons that don’t fit in this text (one of them: usually they have the best students). The problem with public universities is that usually they don’t have courses at night, so it’s hard to have a full-time job and stay at the university: they do this on purpose, they don’t want you to have a full-time job and study. Usually, after the 3rd or 4th year it becomes possible to have a full time job and study (there are less disciplines, some are moved to the night shift). Again, some courses like Business and Accountability exist at the night shift even in public universities.

    Also, here in my country when someone looks if you have an university dergree, they will not only *if* you have the degree, but they will also look in *which* university you studied. We have a lot of different universities here, and some of them are really bad, some of them are really good. A lot of “bad” universities are the ones that have courses at night, don’t push their students too hard and also cost a lower price.

    I agree with you with the “signaling” argument: the fact that you went to a bad university doesn’t mean you’re incompetent. But the fact that you studied in a good university means that at least you’ve studied a lot and are capable of doing something as difficult as finishing the unviersity degree in a difficult university…

    Another thing we have here in Brazil are courses that last 1-2 years and give you knowledge about some specific area. We call these “technical courses”. You need to have finished high school to do these courses, but you don’t need to have an university degree. It’s something that seets between having “only high school” and having “an university degree”. It’s usually possible to do these courses and have a full-time job (and sleep too).

    Another argument: in my previous job, one of the most competent employees we had didn’t have an university degree. He was a true genius: we usually gave him the problems no one else was able to solve, then he solved these problems in a few hours. No one questioned his competence just because he didn’t have a degree. But what I always asked myself was: if he went to the university and studied all that stuff he didn’t study, wouldn’t this enable him to become even more brilliant than what he currently is?

  • Adam Skutt

    While I don’t disagree that the comparsion needs to be over one’s “working life”, I think 45 is considerably too low of an age. My parents are in their 50s and still have one child to put through college; they will be much closer to 60 than 50 when he’s out. If my wife and I have children, they won’t graduate college until we’re in our early 50s. 55 or 60 makes a better age. It’s also a more realistic age to expect for a mortgage to be paid off too, if it’s paid off at all. Hence why the comparsions usually go to retirement age.

    I also don’t think including higher-earning degrees in a macro comparsion is the least bit unfair. Choosing to go to college gives you more opportunities, hence we expect greater earnings. Crippling the comparsion because the alternative doesn’t afford the same opportunities doesn’t led to a true conclusion. Of cousre, on a individual/micro level, the difference may not matter, especially if you’ve decided what you want to do upfront.

    While I don’t disagree that early learning leads to later success, I’m not sure it’s particularly relevant here.
    Most of the desirable high paying jobs (in the USA) outright or effectively require a degree: getting in without one is sometimes possible, but it requires a lot of luck, and you’re frequently going to get passed over by those who do possess degrees (even if they are less competent in reality). This is largely a social phenomeona, but it’s also inescapable to a large degree. It’s especially relevant now, with unemployment so high in many places.

    Accordingly, we’re seeing lots of jobs that don’t really require higher education demanding a degree anyway. This would not be so bad if higher-education were cheap, but the system in the USA is particularly punishing. Fundamentally, noting that a smart person can be succesful without a degree is probably true, but I’m not sure it matters if the only positions open to them without it are positiosn with limited opportunites for advancement (e.g., ‘Would you like fries with that’). OTOH, if you go 50-60k in debt to get a degree and that’s still the only position open to you, then the degree was obviously a bad purchase. Personally, I’m a big believer in education in general, so I think fixing the debt problem is the right solution instead of telling people to not go to school.

  • I think it is a country or cultural thing. In Australia outside the careers where you MUST have a degree I doubt very much there is a difference. In fact in IT it probably doesn’t matter at all; my team at work has a mixed group of people with and without a degree but you wouldn’t know from their salaries or what they do.

    I have heard in America or with American companies that it makes a difference, purely because the company demands it for some reason. I’m not sure if that makes those companies better or not. It also explains why, for instance in IEEE there are a lot more engineers with post-graduate degress or doctorates from the US. I’ve heard from people with these things in Australia it can be a deterrent.

  • Russell makes good points. this is, however, a very narrow discussion,
    intentionally limited to the purely financial benefits of having a university
    education. There are many other rewards as well that lie outside the scope of
    this debate.

    One advantage which is I think insufficiently recognized is that an
    undergraduate degree apparently contributes, on average, measurably to a
    person’s aptitude for reasoning and critical judgment, at least as determined
    by standardized psychological instruments. It is important to a
    well-functioning democracy that the citizens be well informed and capable of
    assessing issues of public importance. Thus, becoming educated at the
    university level is good for the individual, and having a more educated
    population is correspondingly good for democracy.

    As another interesting indicator, it was reported recently that better
    educated people tend to have more successful marriages (lower divorce rates).
    The benefits, I think, are profound and varied, but Russell makes a good case
    for the claim that in strictly financial and career terms the advantages are
    also considerable.