Wednesday, July 30, 2003

Returns to education: Elite or not? 

I meet many parents of college-bound students who ask if the education at St. Cloud State is as good as they'd get at, say, the Univ. of Minnesota or Wisconsin-Madison. I tell them that I think so, but that the problem is often convincing potential employers that their child with an SCSU degree is just as good as the identical graduate of the more prestigious institutions. (We'd love to think they come just for the love of education, but, as my own college freshman says, "ch'yeah right, Dad.") Part of what one buys, I tell them, is a credential, and credentials from one place will have more value than from another place. A violinist who studies at Julliard will be more likely to win an audition for the symphony over the violinist from East Southern State University, even if both sound the same in the audition.

Financial Aid Office points today to a couple of articles on financing education in prestigious schools. The quote that seems to be drawing attention both from FrankAdmissions and from Joanne Jacobs is this:

Maybe a B.A. is worth real money because it signals to employers that the job candidate is capable. If so, there ought to be some way to send this signal without blowing $160,000 on four years of liberal arts courses. Think of all the savings to society if Yale were willing to sell, for a mere $16,000, a certificate saying that such-and-such an applicant was duly admitted but chose not to attend.
Well, it's really the argument we make about the music industry and Napster: A college education is a bundled good: The credential is part of it; the classes another; good alumni associations and the networking that attends them a third. (Did I miss an important piece? Hit the comments!)

So the question is, what's would be the market price of an Ivy credential? There are two papers I've seen on this. One of them by Stacy Dale and Alan Krueger (non-technical summary here, described in Forbes here -- I haven't found a full copy available for free yet, but it's in the Nov. 2002 Quarterly Journal of Economics if you want to look it up) suggests that there's no inherent difference between the earnings of graduates of the elite and non-elite institutions. Another paper by James Monks (described here top item, published in Economics of Education Review, June 2000) says that there is a 3-7% return from entering the elite institution. Very interestingly, the premium is higher for research institutions or those schools with graduate programs than for elite liberal arts schools.

I favor the Dale and Krueger result because it corrects two problems. One is of course selectivity bias -- better students and those who are more likely to be successful anyway will choose better schools. Dale and Krueger get around this by using a sample of students who were admitted to more than one institution -- 41% chose to go to the "lower-prestige" school -- and to explain these choices. Monks doesn't do that. The second problem is one of "unobserved characteristics" of students that may correlate with college choice. Again, I find that Dale and Krueger addressed those issues better. So I'm inclined to put weight on their conclusion that the value of the degree isn't that high for most people. But what is also interesting in their paper is that unlike previous studies, they show that disadvantaged students do get a benefit from attending elite schools (though the sample of these students is relatively small).

So why are college costs going up? Most economic research suggests that the return on higher education has been quite high -- in the late 1970s, according to Dale and Krueger, it was in the area of 16-18%. But college costs have risen as universities realized they could capture a higher share of those returns in the form of higher tuition. As a result, the returns to higher education are returning to more normal levels (which I take to be in the 8-10% range). As FAO also posts today, these rising costs are becoming an election issue, which makes sense because it's purely a distributional question. Who should get the higher returns from a university degree -- the student or the university? And in what shares? It's on these questions that most domestic politics turn.

Certainly, as Frank suggests, the value of a liberal arts education is more than just the credential or training for a specific job, as he links to this speech by a UMichigan faculty member. But failure to explore additional markets for higher education, and to price them correctly, leads to less work for us in academia.