Thursday, September 4, 2014

NY Fed: College Does Not Pay Off for Everyone

By Jaison R. Abel and Richard Deitz

In our recent Current Issues article and blog post on the value of a college degree, we showed that the economic benefits of a bachelor’s degree still far outweigh the costs. However, this does not mean that college is a good investment for everyone. Our work, like the work of many others who come to a similar conclusion, is based in large part on the empirical observation that the average wages of college graduates are significantly higher than the average wages of those with only a high school diploma. However, not all college students come from Lake Wobegon, where “all of the children are above average.” In this post, we show that a good number of college graduates earn wages that are not materially different from those of the typical worker with just a high school diploma. This suggests that, at least from an economic perspective, college may not pay off for a significant number of people.

     The chart below plots the median annual wage for full-time employed workers with a bachelor’s degree between 1970 and 2013, together with the median annual wage for those with only a high school diploma. We also plot the annual wage for the 25th percentile of college graduates. All figures are expressed in constant 2013 dollars.

 The much discussed college wage premium is quite clear, as the median worker with a bachelor’s degree earns well above the median worker with only a high school diploma, a trend that has held throughout the past four decades. Measured at the medians, the wage premium for a bachelor’s degree has generally hovered between 60 and 70 percent since the 1990s. As we have cautioned before, this earnings gap may arise at least in part from differences in the skills and abilities of those who earn a college degree compared with those who don’t, rather than from the knowledge and skills acquired while in college. 

     However, when we look at wages for the 25th percentile of college graduates, the picture is not quite so rosy. In fact, there is almost no difference in the wages for this percentile ranking of college graduates and the median wage for high school graduates throughout the entire period. This means that the wages for a sizable share of college graduates below the 25th percentile are actually less than the wages earned by a typical worker with a high school diploma. While we can’t be sure that the wages of this group wouldn’t have been lower if they had never gone to college, this pattern strongly suggests that the economic benefit of a college education is relatively small for at least a quarter of those graduating with a bachelor’s degree. 

     When we look at men and women separately, the same basic wage pattern holds, although a wider gap opens up among men. The 25th percentile for male college graduates has been about $4,000 to $5,000 more than the median male high school graduate in recent years, whereas among women, the gap has recently been around $2,000. This difference between genders suggests that some people may be choosing lower paying jobs because of occupational preferences or family considerations. 

     Overall, these figures suggest that perhaps a quarter of those who earn a bachelor’s degree pay the costs to attend school but reap little, if any, economic benefit. In fact, once the costs of attending college are considered, it is likely that earning a bachelor’s degree would not have been a good investment for many in the lowest 25 percent of college graduate wage earners. So while a college degree appears to be a good investment on average, it may not pay off for everyone. 

Jaison R. Abel is an officer in the Federal Reserve Bank of New York’s Research and Statistics Group. 

Richard Deitz is an assistant vice president in the Bank’s Research and Statistics Group. 

The above originally appeared at the New York Federal Reserve blog, Liberty Street Economics

1 comment:

  1. The $5 million cop: How the Jacksonville pension program can turn police, firefighters into millionaires

    When Bobby Deal retired from the Jacksonville Sheriff’s Office last month, he did so with the promise of a nest egg worth at least $4.9 million, a sum he’ll be paid over the next 25 years.

    Deal now earns nearly 50 percent more per year as a retiree than he did when he worked for the Jacksonville Sheriff’s Office.

    Slideshow: Meet 16 recent retirees whose combined $4 million in DROP accounts will yield $11 million

    That’s just for starters.

    A guaranteed 3 percent cost-of-living increase annually and the ability to bankroll a separate pension — funds from his Deferred Retirement Option Plan account potentially paid by taxpayers — will allow Deal one day to bring home twice as much money per year as a retiree as he did when he worked.

    Deal, though considered highly paid when he was a cop, is far from alone as a pensioner who will make considerably more in retirement than when he was working.

    Deal is among a group of 16 July retirees who are guaranteed to turn $4 million in DROP benefits into $11 million in additional pension benefits.

    The DROP program is considered one of the greatest perks of the job for Jacksonville police officers and firefighters. It is much more lucrative than any other DROP program for state and other city employees.

    No other police and fire pension fund in the state offers such lavish guarantees — money on top of a regular pension, potentially for life.

    And no other large municipal pension fund in the state is in such dire financial shape as the Jacksonville Police and Fire Pension Fund, which is $1.65 billion in debt and is so underfunded that the city’s bond ratings have suffered.

    “Our pension benefits are so generous that we really are creating millionaires,” City Councilman Bill Gulliford said.

    Police and firefighters say they have worked hard for these benefits, which were negotiated long ago and approved by the City Council.

    The DROP program allows police officers and firefighters with just 20 years of service the chance to put five years of future pension checks into what amounts to a secondary, high-interest retirement account while they continue to work and draw their regular pay.

    why go to college at all?