Rate of Return to Education Investments: Economic and Social Paul Sommers, Seattle University A Progress Report from NORED, June 2006.

Rate of Return to Education Investments: Economic and Social

Paul Sommers, Seattle University

A Progress Report from NORED, June 2006

National Data on Educational Attainment and Earnings

Source: Hill et al. The value of higher education 2003, p. 14

Rate of Return to College Education Increased over Last Two Decades

Source: Hill et al. The value of higher education , 2003, p. 15

A Note on “Credentialism” Several distinguished economists offered

prognostications of and over-supply of college graduates and a likely reduction in earnings of those with BAs or higher in the mid-1970s

Margaret Gordon, Higher Education and the Labor Market, 1974

Richard Freeman, The Overeducated American, 1976

A worse prediction could not have been made! The historical record shows just the opposite – higher wages for college graduates over time, and a larger gap between BA and higher wages vis á vis lower levels of education attainment

This should give some pause concerning the idea that we are now approximately in supply/demand balance on BA level degree production

Voluminous literature on RofR to Education in Many Countries

Psacharopoulos & Patrinos (2004) review studies from 73 countries

“Social” return in this figure just takes into account public investments in education

Spillover, or externality effects are discussed but no estimates of these effects are provided

Costs vs. Benefits of a BA Degree

Source: Hill et al. The value of higher education, p. 17

Other Studies

Kentucky study (Education and the Common Good, 2001) compares BA holders to high school graduates $357K increase in lifetime earnings

for men and $156K for women; Higher levels of income tax

contributions by college grads; More voting, less smoking, less

welfare use, more volunteer hours

Other Studies

California study (Return on Investment, 2005) finds a doubling of income, comparing college grads to high school grads, and notes significant differences by race/ethnicity/immigrants

Other Studies

Monk-Turner (1994) found a 7.9% return by age 27 to students who started college at a 4-year institution, and a 5.4% return to similarly aged students who started at a community college.

Most rate of return estimates have gone up in recent years, but this is the only study comparing 2- and 4- year degree holders

Training Programs for Dislocated Workers and Adults Lacking Basic Education

Jacobson et al. (2004, 2005) Additional year of college is

associated with 7% higher future earnings

Opportunity costs are high for workers over 35 who may be better off just going back to work rather than pursuing higher education

Study uses administrative data from Washington

Training Programs for Dislocated Workers and Adults Lacking Basic Education

Hollenbeck and co-authors (2003) provide preliminary results from studies in 6 states incl. Washington using administrative data Small positive cost-benefit results in most

states; negative impacts in one Hollenbeck (2004) reports results only

from Washington 5-10 percent earnings increases for job training

participants compared to a similar group of dislocated workers who just went back to work

Training Programs for Dislocated Workers and Adults Lacking Basic Education

Prince and Jenkins (2005) find a “tipping point” – ABE and ESL students who go on to complete at least a year of college credit courses had earnings $1700-2500 higher than students who completed 10 or fewer college credits after ABE/ESL training I-BEST program devised to keep these

students involved and participating long enough to get past this tipping point

Types of Social Returns Spillover or externality impacts (Moretti;

Hill et al.) more degreed individuals in a regional economy higher wages for everyone because productivity goes up, technology development and adoption increase, and positive feedback loops put the region on a faster growth track

Non-monetized benefits – less crime, more civic participation, lower dependence on safety nets, better health outcomes, more charitable giving

Moretti’s externality study Cross sectional data from 282 cities at

three points in time (Census years) with lots of control variables to take into account many potential competing explanations, PLUS a longitudinal study of 6,791 individuals from 201 cities

Results, consistent across both bodies of data, suggest that a 1% increase in college grads in a city result in wage increases of:

1.9% for workers who did not graduate from high school 1.6% for high school grads in the city 0.4% for college grads

Crime Lochner & Moretti (2003) study uses multiple

data sets and carefully designed statistical analyses to explore the relationship between education and crime

Findings: 1% increase in high school graduation rates

nationally would save $1.4 billion, about $2100 per high school graduate

This social return is 14-26% of the private return to the high school graduates, or $53 to 100 billion

Authors compare these benefits to 1990 average national cost of a year of high school of $6,000

Early Childhood Interventions Reynolds et al. (2003) longitudinal study in

Chicago claims a $7.14 benefit to society for every $1 invested in an 18 year longitudinal study of children in Chicago Child Parent Centers (n=989) vs. a comparison group (n=550)

Chicago Child Parent Centers emphasize early intervention, parent involvement, structured language/basic skills learning, health and social services, and program continuity into early school years

Benefits include stronger parental support, lower juvenile delinquency and greater educational achievement by age 21; dollar estimates came from costing out lower justice system and remedial education costs

Early Childhood Interventions Rolnick and Grunewald report on the

Perry Pre-School program in Ypsilanti, MI Outcomes for 123 children in pre-school

program, relative to a comparison group Perry Pre-School participants were:

more likely to graduate from high school, more likely to earn more than $2,000 per

month, and less likely to have been incarcerated as of

age 27; Rolnick and Grunewald calculate a 16%

real rate of return on investment, with most of the benefits going to the public at large (e.g., lower justice system costs)

Early Childhood Interventions Lynch (2004) provides cost estimates

for a national pre-school program for all 3-4 year olds in poor families Estimated cost $20B in first year and

tapering off thereafter as savings kick in (children do better in school; later on less crime, more employment in well paying jobs and less use of social assistance)

New tax revenues would offset costs by year 17

Early Childhood Interventions vs. Higher Education Investments

Higher education returns may be largely private returns to the student who earns more after completing college

Early childhood studies emphasize social returns including lower costs in K-12 education because these children are better prepared for school, as well as lower criminal justice and social assistance system costs

Higher education also impacts criminal justice and social assistance costs

The College Board:“Education Pays”

Statistical correlation is clear, but no controls for causality problems

The College Board:“Education Pays”

The College Board:“Education Pays”

The College Board:“Education Pays”

The College Board:“Education Pays”

The College Board:“Education Pays”

Additional findings – as education level increases: Volunteerism increases Voting rates are higher Children have better learning behavior

and cognitive skills More likely to donate blood Social program expenditures are lower

Source:Tom MortinsonPost-SecondaryEducation website

Conclusions Convincing evidence from well crafted studies

published in leading journals: Early childhood programs reduce K-12 costs and result in

higher earnings A high and increasing rate of return to earning a

bachelors or graduate degree A substantial return for an associates degree or technical

program certificate Higher earnings higher tax revenues and lower social

assistance costs Solid evidence from well done studies using WA admin

data Positive returns for dislocated worker and ABE/ESL if they

go on to take at least a year of college credit courses Opportunity costs reduce overall return estimates

especially for older workers

Conclusions Social returns have been demonstrated in

well crafted studies Less crime Spillover impacts on non-degreed workforce as

degreed workforce grows Productivity impacts that turn into higher

wages Correlational studies not proving causality

but suggesting additional impacts Better health/less smoking, more voting, more

volunteerism, etc., etc.

Conclusions

Correlations do not prove causation and extrapolation from these studies to potential returns on investments this state might make must be done judiciously!

Those who benefit from higher education may differ from those that have historically not participated in ways for which even the best of studies may not have devised good controls

Potential areas for investment suggested by this literature Pre-school programs Plug leaks in education system Expand access to higher education in low

participation rate counties and among minorities

Displaced worker and adult education programs

Labor market has an enduring appetite for better educated workers – actions to “feed” that appetite will have many positive impacts