Degree's Benefits Extend Beyond Earnings

Full article: 

Degree's Benefits Extend Beyond Earnings

Looking for a good investment that has outperformed almost anything else for the past several decades? Try education. The returns to higher education have been well documented – they are broad and substantial.

Most people know that college graduates earn more than those who don’t graduate from college; however, it may be a surprise that the financial benefits of a college education have been increasing over time. Gary Becker, a Nobel Laureate economist, reports in his blog on April 17, 2007 that in the 1970’s, a college graduate, on average, earned about 40 percent more than a non-graduate. Today, this premium has increased to about 80 percent.

The growing returns to education extend to non-economic factors as well. Professor Becker explains that educated people enjoy an improved quality of life since they are healthier, have more stable marriages, commit fewer violent crimes, are better at managing their finances, and adjust more effectively to changing and unexpected factors of life. These studies aim to isolate the effect of education by adjusting for factors such as the effect of personal ability and family background.

Why has this “college premium” increased in the past decades? As organizational decision-making has been pushed down the hierarchical line, employers seek more people who have had the educated training and, thus, are more likely to have the competence to make those decisions. The growth in the use of technology also has increased the demand for educated and other skilled persons. Part of this growth in demand for educated workers has been caused by the decline in the cost of plant, equipment, and other physical capital. An educated workforce is complementary to physical capital, whereas low skilled labor is a substitute. Hence, as firms increase the use of physical capital, the demand for educated inputs increases relative to the demand for the less educated.

Not surprisingly, with the increasing benefits of a college education, the percentage of high school graduates who go to college also has increased. Today, more than 60 percent of high school graduates get some higher education, one of the highest in any country. At the same time, the fraction of those dropping out of high school, some 20- 25 percent of high school students, has not declined by very much, despite the huge increase in the returns from greater amounts of schooling. There may be no good explanation for the lack of response in the high school graduation rate, except that, as Becker cites, the American family structure started deteriorating rapidly before the returns to education began to rise rapidly. The reduced preparation for school offset the increased benefits from additional schooling.

The Economics Center for Education & Research shows that financial benefits to education in the Cincinnati region are similar to those of the nation. In the Cincinnati region, median earnings for those with a college degree are 74 percent higher than for those with a high school degree. Earnings for those whose highest degree is from high school are 43 percent higher than for those who have not finished high school.