Ph.D. earns more than Bachelor. Does it mean education improve your ability?  

 

11-126js07

(source: http://ocw.mit.edu/courses/urban-studies-and-planning/11-126j-economics-of-education-spring-2007/)

After reading and discussing so much about education across the semester, I couldn’t resist the temptation to write some problems about education based on my Economic background.

Education is so fascinating that in Economics there is even a specific field called Economics of Education. The main research questions in this field are what is education for? How to measure its effectiveness? What is its return to human capital? These questions are explored by theoretical framework and tested by quantitative methods.

There are two main theories about the purpose of education. One is that education is to improve personal ability. Another is education is for signaling. This signal theory is based on assumption of information asymmetry.  The future employer and the candidate have different information about the candidate’s ability. The candidate may know his/her ability quite well, but the employer doesn’t have the full information about the ability. The only thing the employer knows is the candidate’s education: the degree the candidate holds, the university the candidate attended and the corresponding grades. Therefore, college graduator uses this education attainment, sending signals to employer about their ability to compete with other potential candidates.

Personally, I don’t buy this signal theory. I am more inclined to view education as a way to improve ability. However, ability is such an ambiguous word that there isn’t any ways to accurately measure it. The standard test score is just a proxy to part of the ability. Certain part of interpersonal ability like communication skill is hard to measure.

Because of the difficulties in measuring ability, it is hard to evaluate the return of education for individuals. Though it is true people holding higher education degree earns more, but it is hard to draw causality here. We cannot attribute this high earning to education. Because we don’t observe student’s ability, there are potential confounding factors. It is highly possible that people of high ability are more likely to be selected into better universities or later attend graduate schools. The higher pay those Ivy League graduates get may due to their high abilities, not their attendance of elite school. The causality can only be draw if we control all other variables other than education. For example, two groups each with individuals of exactly the same ability and family background, but one group went to university and another didn’t. If the first group earns significantly larger than the second group, then we can say education influence future earnings. Otherwise, it is just correlation, instead of causality. However, such experiment involves serious ethical issue that won’t be feasible nowadays. In fact, there is already research shows (Dale and Krueger (2002) ) if we control for the ability, attending elite university actually won’t increase the future salary.

Everything comes with a cost. There is huge opportunity cost, both money and time, of attending university. It is highly possible in the future that we can use the time and money to travel around the world, which may end up a better investment than university education. How to make university education more valuable? I am really looking forward to this challenging, yet rewarding exploration.

 

 

Reference:

Berg, Dale, and S. A. Krueger. “Estimating the payoff to attending a more selective university. An application of selection on observables and unobservables.”  Quarterly Journal of Economics (2001).