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).

7 thoughts on “Ph.D. earns more than Bachelor. Does it mean education improve your ability?  ”

  1. I had not thought about degrees as common signals only, so it is interesting to learn something new. I had presumed that ability would be conferred or expressed through other experiences such as internships, or through professional commonalities.

    While the level of degree is a signal, I am more inclined to believe that having a consistent level of “sustained superior performance” is what these degrees and professional experiences reflect. Everything comes at a cost and hopefully this investment is useful, especially when people throw around concepts such as degree inflation.

    What we have, as other posts this week suggest, is the opportunity to make lasting connections academically and professionally, at these higher level degrees and contribute to the body of knowledge.

    Hopefully it gets us paid. But if I were doing it for the money, the arts were perhaps not the best choice.

    Ken

    1. Hi, Ken, I guess the only reason most of the research done on salary is because the accessibility of the data. And, yes, you are right that education is not just about salary. There are other non-monetary rewards associated to that.

  2. Thank you for your post discussing the value of education. I am curious what the salaries are now, and how they compare to bachelors degrees in the current decade. I wonder if with the increase in PhD’s, there is a decrease in salary compared to the time from which the bar graph above was generated. I believe that we must find the value in education beyond the salary, because as Kent commented, salary is temporary and changing. I think worth in education can come from the desire to learn and be inspired to then generate changes for others. Hopefully “humanizing” education can contribute to this worth.

  3. Yanliang, I think it is inappropriate to look at the value of one’s education in terms of the salary one gets after graduation. As you yourself mentioned there are some skills one learns in the educational process that cannot be measured easily. But one still does acquire those skills through education. Sometimes, a few of these skills may not directly translate into one’s salary but I do not think the aim of education is to earn more money. It is rather to develop effective citizenship in people. And as long as education helps people acquire effective citizenship and the ability to think critically and work for the good of all, I think it serves its purpose. While there is a huge opportunity cost in going to college to get educated, there is even a bigger cost in not getting educated. And I do not think everything in the world can be measured in terms of money.

  4. I concur with Ashish, but would note that salary is definitely ONE measure of the value of a degree. But only one. And even that is a moving target. Certain degrees from certain institutions might correlate to high starting salaries, but 10 or 15 years out, the picture might look quite different. And surprisingly (in this STEM obsessed world), longitudinal studies indicate that holders of less “practical” degrees often make more over their lifetime earnings than others, even if they start at a lower pay level.
    I do appreciate the kind of “nuts and bolts” perspective on “value” invoked here — it is an important tool. But I would argue that it is useful mainly as a heuristic device – one that invites triangulation and contextualization with other equally valid indicators of “value.”

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