Is Higher Education Still Worth It?

Special Focus : What is the Value of Higher Education?
Higher Education October 19, 2015

Today, we often hear about high prices charged by universities and colleges while, at the same time, graduate unemployment and underemployment has increased with the sluggish economy. Students may be saddled with sizeable loan debts in order to complete a degree.  We have recently seen students very visibly complaining about this situation in the “Occupy” movements in the United States, the demonstrations in Britain over steep tuition hikes, the noisy student strike over tuition increases in Quebec, and several other places. The question justifiably arises in the minds of students and their families: Is a university (or other postsecondary) education still a worthwhile investment of one’s time and resources? 

Fortunately, there is now much data available to shed light on this question. First, we should note that economists have carefully studied the labor market “returns” on people’s investments in their “human capital” via higher education for about fifty years now, over many countries (Becker 1964; Psacharopoulos and Patrinos 2004; McMahon 2009).  While there are some variations across countries and time periods the findings have been remarkably consistent. These studies take into account both direct educational costs and the value of students’ time in school (and thus out of the job market) and they discount benefits for time and taxes paid. In most cases they also take into account other factors, such as individuals’ socioeconomic status and measured intellectual ability, that may help explain higher earnings of graduates. The repeated finding is that higher education has paid off well for most people: typically over a working life graduates earn enough more than comparable non-graduates to equal about a ten percent annual return on their initial investment, which is very comparable to calculated returns on physical capital investments by businesses and governments. It should also be mentioned that returns to society on its investments in higher education, in the form of higher worker productivity and taxes paid, lower dependency costs of graduates, and the like, are generally found to be similarly favorable (Psacharopoulos and Patrinos 2004; McMahon 2009). 

Of course, these calculations are of necessity based on historical data. The question arises: Will the future be like the past?  The best evidence is that the foreseeable future is likely to be, if anything, more favorable to the well educated than recent decades have been.  The reasons are not hard to find in what is often called aknowledge-based modern economy (Goldin and Katz 2008).  Good jobs today require both skills, especially cognitive skills, and adaptability – that is the ability to learn new things (e.g., new software programs) and adjust to rapid change in products, processes and organizational arrangements. The modern economy also often rewards innovators handsomely. Education helps to develop these kinds of skills and capacities.  

This does not mean that everyone needs a baccalaureate or graduate degree to prosper, though.  I tell my students that the slogan “college for all” that one sometimes hears advocated in the U.S. actually should be interpreted to mean “some form of postsecondary education for most.” Labor market analysts find that modern developed economies are producing plenty of “middle skilled” jobs that can be filled by people with good postsecondary training and credentials that can be completed in one or two years (Carnevale, Smith, and Strohl 2010). Postsecondary study is necessary for these jobs because skill demands are greater than in the past in fast growing fields utilizing extensive technology like health care, communications, and energy production, not to mention information technology.  Even traditional industries use IT much more extensively than in the past and many jobs are simply more demanding.  To be sure, there will continue to be lots of service and other jobs with limited skill demands but these will not be the jobs paying well.  Thus, higher education is very likely to continue to pay off well over the long run of a worker’s career.

But what of the current labor market softness?  University graduates, particularly recent ones, are unemployed and underemployed at substantially higher rates than was true before the onset of the Great Recession. This is typical of periods of economic sluggishness. But graduates are still faring much better than people without advanced education. In the U.S., a recent study puts the unemployment rate for recent college graduates at 6.8 percent, compared to 24 percent for recent high school graduates (Carnevale, Jayasundera, and Cheah 2012). And, eventually, things will get better.  So, it makes little sense for someone to reject enrolling in higher education either because of concerns about the current labor market or out of fears that higher education won’t pay off in the long run.  In fact, now is a good time to enroll from the standpoint of one component of the cost equation, what economists call the opportunity cost of the student’s time spent in school. When unemployment of the less educated is high and wages stagnant, opportunity costs of attending school are relatively low.  Indeed, many institutions of higher and postsecondary education are facing strong pressures to expand enrollments now for just this reason.

Yet, there is the rub. In many countries, due to the economy, governments have reduced financial support of higher education and either allowed or have sought to allow tuition and fees to rise sharply. So, just when more students want to enroll and may be hard pressed for funds, prices are escalating. This pattern not only irritates students and their families, it has real negative consequences for societies. First, we know that students do respond to prices. For example, applications for university places are reported to be down nearly ten percent in the U.K. this year where tuition has been sharply increased.  Studies show that in general, as would be expected, lower-income students are most likely to be deterred by higher prices. So, unless ample subsidies are provided to such students and these are widely known, equity across income groups will be unfavorably affected. Second, if institutions become overcrowded, there is some evidence that degree completion rates may decline (Bound and Turner 2006) and again the lower socioeconomic groups are likely to be affected most. Finally, if institutions are forced to turn away qualified students, countries will be foregoing investments in human capital that research strongly suggests will be productive in the long run both for the individuals involved and for national economies. Again, due to institutional selectivity, the students most likely to be kept out of institutions that are full will be disproportionately those from less advantaged backgrounds.

In sum, higher education is the wrong place to cut government budgets and reduce opportunities for citizens to improve themselves and their productivity. No doubt, higher education institutions and systems need to become more efficient and, in current circumstances, most countries will need student tuition and fees to play a role in their finance. Tuition policies should be, however, related to people’s ability to pay and drastic movements in students charges should be avoided or at least buffered by need-based aid to students. Creative schemes for reducing the burden on students of paying for university education by deferring tuition until the student is earning and seeing benefits, and allowing repayment rates to vary with earnings, are in place in a few countries.  These certainly deserve to be studied and explored for possible broader application. 

For additional reading on many of these topics, readers may wish to consult, W. Zumeta, D. W. Breneman, P. M. Callan, and J.E. Finney (2012). Financing American higher education in the era of globalization, recently published by Harvard Education Press.

– Becker, G. S. (1964). Human capital: A theoretical and empirical analysis, with special reference to education. Chicago: University of Chicago Press.
– Bound, J., and S. Turner (2006, August). Cohort crowding: How resources affect college attainment. National Bureau of Economic Research, working paper 12424.
– Carnevale, A. P., T. Jayasundera, and B. Cheah (2012). The college advantage: Weathering the economic storm. Washington, D.C.: Center on Education and the Workforce, Georgetown University.
– Carnevale, A. P., N. Smith, and J. Strohl (2010). Help wanted: Projections of jobs and education requirements through 2018. Washington, D.C.: Center on Education and the Workforce, Georgetown University.
– Goldin, C. D., and L. F. Katz (2008). The race between education and technology. Cambridge, Massachusetts: Belknap/Harvard University Press.
– McMahon, W. W. (2009). Higher learning, greater good: The private and social benefits of higher education. Baltimore, Maryland: Johns Hopkins University Press.
– Psacharopoulos, G., and H. A. Patrinos (2004). Returns to investment in education: A further update.Education Economics 12: 111-134.