Friday, December 28, 2012

A thought about the economics of college education.

Source: Bloomberg BusinessWeek
The salary of an employee is presumably determined by the labor market, and the supply and demand for employees with specific skills. Students graduating from college with systems engineering degrees make more money than those graduating with biology degrees because employers are willing to pay more for the computer types and they can find well paying jobs. Of course, employers must expect to make enough money from an employee's services to pay him and also have a profit consonant with investment (albeit with a new grad, there may be a time delay in the returns).

The ratio of average salary in the first working year to average tuition and fees in the final year of college should be considered carefully. It is likely that the higher the initial salary of the average college graduate in a given field, the higher will be the present value of the average lifetime earnings. It is also the case that a student must live while going to college, so fees and tuition are only part of the cost. There are also "costs" of foregone earnings, assuming that the student could get a full time job if not going to school. Nonetheless, it seems likely that it is a much better investment for a student to get a degree in systems analysis or engineering rather than one in Black studies, Art of Anthropology.

I have always been concerned that the income of the graduate is a poor indicator of the social value of the college degree. How much do people gain from the services of a minister, a nurse, or teacher, and how much of that benefit is appropriated by the provider of the service in terms of salary? How much benefit comes to a community that has well run churches, well run hospitals and well runs schools that is not captured in the salaries of ministers, nurses and teachers? We need measures of such externalities if we are to make good decisions on the funding of public education. It may be that the total social value of the systems analysts and engineers is greater than that of the lower paid professionals, but that is not necessarily so.

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