14 Jun 2012 etbe   » (Master)

The Financial Value of a University Degree

I’ve read quite a few articles about the value of a degree. Most of them come from the US where the combination of increasing tuition fees and uncertain job market makes a degree seem like a risky investment. I think that most analysis of the value of a degree are missing some important points.

The Value of Money at Different Times

The value of money is different at various stages of your life. The impression that I get is that when a married couple have their house fully paid off and they either don’t/won’t have children or their children are old enough to leave home the amount of money that they earn seems to matter a lot less. Doing a university degree involves 3 or 4 years not earning money (or more if doing post-graduate studies), which is usually starting at the age of 18. Effectively getting a degree involves giving up some money while young for the opportunity to earn more when older. Any analysis based on directly comparing the money spent on the degree to the amount of financial return without considering when money is needed is not very useful.

I think that a reasonable analysis would exclude income earned after the age of about 45. By that age most people have either achieved a solid financial position and learned to live within their means or messed up their finances so badly that they won’t live long enough to recover.

A Degree as a Signal

The Wikipedia page on economic signalling gives education as an example of a signal. A signal in this case means something that doesn’t inherently mean anything but which signifies something else. So completing a degree doesn’t necessarily mean that you learned anything relevant to work, but if you are able to do it then it means that you can probably also do things which are economically useful for an employer. This raises the question of how else one might signal their ability to work. One obvious answer is by working, someone who has remained steadily employed for 3 or 4 years has demonstrated their ability to work reliably and get along with other people which should be at least as useful as a signal.

It’s Not Only the Degree

Most analysis seem to compare average income of people with degrees with the average of income with people who didn’t attend university. That is based on the assumption that the degree was the only difference.

When I was young my parents spent a moderate amount of money on a full set of paper encyclopedias (about 2 meters of shelf space). I’m sure that this gave me some educational benefit as they intended, and it was something that was apparently quite rare – I don’t recall seeing a full encyclopedia in anyone else’s house before the Wikireader [1].

My parents also bought me quite a lot of computer gear (back when hardware was really expensive), were always available to drive me to computer users’ group meetings etc, and did everything else that seemed likely to have an educational benefit. The value of such learning opportunities is significant.

I think that almost everyone who had similar learning opportunities to me when they were young will probably have experienced similar support and pressure to attend university. I also think that almost everyone who receives such opportunities will be able to earn more than the median income even if they don’t attend university.

To a large extent people who are going to be successful attend university. A university degree doesn’t make anyone successful if they couldn’t succeed without a degree. There are some careers that just aren’t options if you don’t have a relevant degree (such as medicine and law). But I believe that anyone who is capable of completing a difficult course such as medicine or law (or any other career that has legal requirements for a degree) is capable of being successful without a degree in many other fields. So comparing the wages of a doctor or a lawyer to an average person doesn’t make sense, it makes more sense to try and compare their wages to someone of similar skill who didn’t have such a qualification.

Conclusion

It seems to me that the question is, of the people who had great learning opportunities when they were young and who wanted to succeed, would they have earned much less if they hadn’t attended university?

The next question is, of the people who might earn significantly less without getting a degree, would that salary difference really have mattered, or would it just be a matter of earning some luxury money when they are too old to really need it?

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Syndicated 2012-06-14 01:14:00 from etbe - Russell Cokeretbe - Russell Coker

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