College Premium Research Articles

How Likely Are College Degrees Not Worth It?

In this paper, we estimate the likelihood that workers without a college degree will earn more than those who completed higher education. The resulting figures are highly relevant to the decision-making process regarding college enrollment. Our approach involves the estimation of probabilistic models applied to census data that includes forty-two country-year samples covering economies across the development spectrum. Three sets of results stand out. First, we find a remarkable heterogeneity concerning the estimated probabilities. Among our samples, the estimates range from a little more than 13 percent to almost 40 percent. Second, we document a steady drop in the probability levels for the United States starting in 1980. The U.S. series falls more than 10 percentage points from its maximum in 1980 to its minimum in 2015. Third and finally, we show both theoretically and empirically that there is a strong and negative relationship between our proposed probability metric and commonly-used measures of the college premium, such as the mean and median earnings differentials. These results provide scholars and policymakers with valuable information about the chances of the non-college path being more profitable than the higher education path.

Why hasn't Social Security changed since 1977?

Despite increasing earnings inequality and aging population, there has been no major reform of Social Security since 1977. To account for this puzzling observation, I construct a heterogeneous agent model with incomplete financial markets. There is a government who chooses the replacement rate schedule by maximizing the weighted welfare of all generations alive. I specify the Pareto weights as a function of household's age and identify them both in 1977 and 2018. I find that there was a slight bias towards younger workers in 1977. However, the bias has shifted towards older households in 2018. This shift is a result of counteracting forces induced by: 1) population aging and 2) increased labor productivity risk and increased college premium. The effect of population aging turns out to be stronger quantitatively.

Roadblocks to US Higher Education Access and Influence on US Long-term Economic Growth

It has attracted attention that, despite having the best university system, US college enrollment rate has been stagnant since 1970 and remained much lower than other developed countries, such as Canada or EU countries. The purpose of this paper is to examine the role of education on economic progress, to explain the inconsistency between increasing college premium and stagnant college enrollment rate, and end up with possible policies. It is counter-intuitive that it is not the daunting US university tuition fee that discourage students from college. Instead, studies have shown that it is early-age education (from age of 3 to 5), living environment and marriage status of parents that determines the high school/college academic performance of a student.

Effect of Participation of Foreign Migrant Workers in Labour Market on Native Workers: Evidence Based on Change Noticed in College Premium in Taiwan ROC

ABSTRACTUsing Manpower Utilization Survey data for 14 years from 1999 to 2012, we applied the DDDD (Differences–in–differences–in–differences–in–differences) estimation method to check if rising presence of foreign migrant workers in Taiwan’s domestic labour market had any impact on employment opportunities and wages earned by native Taiwanese workers over time. We used the data capturing the effect of college premium (viz., the additional cost to be borne for getting admission into college) paid by the natives on domestic wage rate during this period. College premium is an indicator of demand and supply for educated labour and we intend to see if the premium has grown with time when influx of foreign migrant workers has grown too. From the results, two interesting phenomena caught our attention. First, labour policy adopted by the Government in Taiwan has played an important role in increasing the influx of foreign workers into domestic labour market, which resulted in significant change in college premium paid by the natives. And, this effect lasted even when instances of strikes and reported cases of labour disputes were relatively higher. Second, the effect of the policy has been varying across genders as our data shows that policy on employment of foreign workers has affected job opportunities of native men workers more than it affected job opportunities of their female counterpart.

Returns to education in China: a meta-analysis

ABSTRACTWithin labour economics, returns to education is an area of focused research. Moreover, amongst studies looking at emerging economies, China is the most widely studied economy. While there is a general consensus that returns to education are positive, studies use various datasets and methodologies and consequently present varying estimates of returns to education. We perform a meta-analysis of these estimates of the returns to education in China, addressing issues of heterogeneity in the existing literature and examining whether variations in reported estimates can be explained by study characteristics such as dataset and estimation methods, among others. The meta-regression results show that variations in reported estimates can be accounted for by study characteristics such as data source, estimation method and sample period, among others. The results support the college premium hypothesis and reveal that the returns to education for college graduates are higher than those for other (lower) levels of education.

New technologies and the labor market

Using newspaper job ad text from 1960 to 2000, we measure job tasks and the adoption of individual information and communication technologies (ICTs). Most new technologies are associated with an increase in nonroutine analytic tasks, and a decrease in nonroutine interactive, routine cognitive, and routine manual tasks. We embed these interactions in a quantitative model of worker sorting across occupations and technology adoption. Through the lens of the model, the arrival of ICTs broadly shifts workers away from routine tasks, which increases the college premium. A notable exception is the Microsoft Office suite, which has the opposite set of effects.

INTERGENERATIONAL MOBILITY IN EDUCATION AND OCCUPATION

We build a model that, according to the empirical evidence, gives rise to oscillations in wealth within a dynasty while keeping intergenerational persistence in education attainment. We propose a mechanism based on the interaction between wealth and effort as suggested by the Carnegie conjecture, according to which wealthier individuals devote less effort in their job occupations than poorer. Oscillations in wealth arise from changes in the occupation chosen by different generations of the same dynasty as a response to both inherited wealth and college premium. Our mechanism generates a rich social stratification with several classes in the long run due to the combination of different levels of education and occupation types. Furthermore, we generate a large mobility in wealth among classes even in the long run. Our model highlights the role played by the minimum cost on education investment, the borrowing constraints, and the complementarity between education and occupational effort.

The college earnings premium and changes in college enrollment: Testing models of expectation formation

This paper studies how students build expectations of the future price of college skills when making college enrollment decisions. I compare several possible proxies for students’ expectations of the lifetime earnings gains from college. Students may base their expectations on the earnings of current workers or they may have some information about future earnings. Since 1970, a forecast of future earnings based on static expectations has been a poor predictor of the ex post college premium for successive cohorts. Nonetheless, high relative earnings for college-educated workers at the time a student graduates high school increases his probability of enrolling in college, while his cohort’s future realized earnings do not. A 10 percentage point increase in the contemporaneous college premium is associated with a 1 percentage point rise in college enrollment rates, controlling for tuition and student characteristics.

Skill complementarities and returns to higher education: Evidence from college enrollment expansion in China

We find that the increased supply of college graduates resulting from college enrollment expansion in China increases college premiums for older cohorts and decreases college premiums for younger cohorts. This finding is inconsistent with the canonical model that assumes substitution among workers of different ages. We subsequently build a simple model that considers complementarities among workers of different ages and different skill levels. Our model predicts that the college premium of senior workers increases with the supply of young college graduates when skill is a scarce resource. The model's predictions are supported by empirical tests.

Partner Choice, Investment in Children, and the Marital College Premium

We construct a model of household decision-making in which agents consume a private and a public good, interpreted as children's welfare. Children's utility depends on their human capital, which depends on the time their parents spend with them and on the parents' human capital. We first show that as returns to human capital increase, couples at the top of the income distribution should spend more time with their children. This in turn should reinforce assortative matching, in a sense that we precisely define. We then embed the model into a transferable utility matching framework with random preferences, à la Choo and Siow (2006), which we estimate using US marriage data for individuals born between 1943 and 1972. We find that the preference for partners of the same education has significantly increased for white individuals, particularly for the highly educated. We find no evidence of such an increase for black individuals. Moreover, in line with theoretical predictions, we find that the “marital college-plus premium” has increased for women but not for men. (JEL D12, J12, J13, J15, J24)

ENDOGENOUS POLITICAL INSTITUTIONS, WAGE INEQUALITY, AND ECONOMIC GROWTH

The paper suggests that the political changes brought about by the increase in the proportion of college graduates in the U.S. labor force in the 1970s may have contributed to the decline in the college premium during the 1970s and its increase during the 1980s and 1990s. The study argues that the proportion of skilled workers in the labor force affected their relative importance in the political process. Thus, the increase in the proportion of skilled workers during the 1970s reduced the skill premium in the short run, but induced a change in policies that favored skilled workers and increased the skill premium in the long run.

Are Rising College Premiums Capitalized into House Prices? Evidence from China

AbstractMany areas in China experienced steeply rising house prices beginning in 2003. We test whether a change in local residency requirements may have played a role in driving up house prices in some places by tying access to Chinese universities to local homeownership status in the presence of a rising college premium. We generate a novel dataset that combines China housing market and neighborhood data with household and university admission data. We find evidence of capitalization effects and a sizable increase in the likelihood of homeownership postpolicy change in places with the greatest preferential access to China's elite universities.

Intergenerational Mobility Under Education-Effort Complementarity

In this paper, we build a model that, according to the empirical evidence, gives raise to oscillations in wealth within a dynasty while keeping inter-generational persistence in education attainment. The mechanism that we propose is based on the interaction between effort and wealth suggested by the Carnegie effect, according to which wealthier individuals make less effort than the poorer. The oscillations in wealth arise from changes in the effort exerted by different generations as a response to both inherited wealth and college premium. Our mechanism generates a rich social stratification with several classes in the long run as a consequence of the combination of different levels of education and effort. Furthermore, we generate a large mobility in wealth among classes even in the long run. Our model highlights the role played by the minimum cost on education investment, the borrowing constraints, and the complementarity between effort and education.

Overeducation in the U.S. During the Great Recession

I use the method introduced by Gottschalk and Hansen (2003) to analyze the rate of overeducation among workers with exactly a college degree between 2006 and 2013. To my knowledge, this is the first study to use this method to analyze trends in overeducation during the great recession in the U.S. I find that the proportion of workers with exactly a college degree working in occupations offering low college premiums increased during great recession and fell afterwards. An increase in the rate in overeducation could be due to more college-educated workers working in noncollege occupations that were noncollege in the past or because there was an increase in the number of noncollege occupations. I show that changes in the rate of overeducation are mostly due mostly to the latter. When shutting the down the flexibility for occupations to change from college to noncollege (and vice versa), the rate of overeducation increases only slightly between 2006 and 2013. Regardless, these findings run contrary to the secular decline of the rate of overeducation during the end of 20th century documented by previous research.

The Increase in College Premium and the Decline in Low‐Skill Wages: A Signaling Story

AbstractThe increase in the college premium over the last 30 years in the United States is to a large extent driven by a reduction in noncollege wages. We show that the signaling effects triggered by an improvement in the incentives to attend higher education can explain this fact, as well as the increase in the number of college graduates. Under imperfect credit markets and wealth heterogeneity, higher education is not only a signal of ability but also of individuals' (parents') wealth. General conditions on the distribution of wealth guarantee that after an increase in incentives to attend higher education, the absence of a college degree becomes a more evident signal of low ability. This results in a reduction in low‐skill wages but not necessarily in increased high skill wages. The increased incentives to enroll in college can either arise from a skill‐biased technology change or an improvement in access to higher education. An important difference is that while skill‐biased technology change always results in an increase in the college premium, that is not necessarily the case when the increased incentives to enroll arise from improved access to higher education.

Accounting for the Rise in College Tuition

We develop a quantitative model of higher education to test explanations for the steep rise in college tuition between 1987 and 2010. The framework extends the quality maximizing college paradigm of Epple, Romano, Sarpca, and Sieg (2013) and embeds it in an incomplete markets, life-cycle environment. We measure how much changes in underlying costs, reforms to the Federal Student Loan Program (FSLP), and changes in the college earnings premium have caused tuition to increase. All these changes combined generate a 106% rise in net tuition between 1987 and 2010, which more than accounts for the 78% increase seen in the data. Changes in the FSLP alone generate a 102% tuition increase, and changes in the college premium generate a 24% increase. Our ?ndings cast doubt on Baumol’s cost disease as a driver of higher tuition.

On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium

In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.

INEQUALITY AND INTERNATIONAL TRADE: THE ROLE OF SKILL-BIASED TECHNOLOGY AND SEARCH FRICTIONS

I embed a competitive search model of the labor market into a small open economy model with heterogeneous firms and workers. Search frictions generate equilibrium unemployment and income inequality between identical workers, in addition to income differences between skill groups. A quantitative evaluation of the U.S. trade experience suggests that the effect of the increase in goods trade since 1980 may have contributed to the increase in the college premium, but not to the increase in residual inequality.

Changes in Relative Ability as a Determinant of the U.S. College Premium

We develop a macroeconomic framework to estimate the importance of fluctuations in relative ability in accounting for trends in the college premium in the United States since 1965. The theoretical scaffolding is a heterogeneous agent model with two dimensions of ability and endogenous schooling choice, with exogenous skill-biased technological change (SBTC), college tuition, and noneconomic social forces. We solve for conditions under which SBTC reduces the relative ability of college educated workers, and show that these conditions are met in the data. We attribute the drop in the college premium over the 1970s to a 25.5% drop in the mean relative quality of college-educated workers from 1968 to 1977. We find that SBTC explains about two thirds of the increase in college attendance since 1965, and that absent both supply shifts and a supply response to SBTC, the relative wage of highly educated workers would have been 77.1% larger in 2013.

RIGID LOW COLLEGE PREMIUMS AND THE EXPANSION OF HIGHER EDUCATION IN TAIWAN

The rapid expansion of higher education in the late 1980s in Taiwan has resulted in a swift increase in the supply of highly-educated workers in the labor market. This research differs from past studies in that it analyzes the effect of the rapid expansion in higher education in Taiwan with emphasis on the cohort effect, specifically examining the effect of changes both in intra-cohort relative supply and the aggregate relative supply on college returns. Besides, when estimating the aggregate relative supply of college graduates, this study takes into account the substitutability between younger and older educated workers. We present evidence that the expansion policy has significantly depressed college premiums for workers of all ages, but the adverse effect is particularly concentrated among the younger cohorts. Furthermore, we found the elasticity of substitution between college and high school graduates to be 3–4 times higher than in developed countries. We also found the important role played by the demand side, likely linked to technological progress and changes in export structure toward the more technologically intensive. As a consequence, the expansion of higher education and increase in the relative demand for higher-educated workers, along with high elasticity of substitution between college and high school graduates, led to the rigid low college premiums.