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The Economics of Education

The Economics of Education

Question: Is the increase in earning potential from college due to additional knowledge gained during the educational period or due to signaling to potential employers that they are able to commit to a task over a multiyear period.

There is no denying that a college degree makes graduates more employable and increases their earning capacity. A 2021 report by Third Way confirms that despite the high cost of getting a degree, the return on investment allows most graduates to recover their costs in less than ten years (Carrns, 2021). However, some fields of study have more earning potential than others, while some have entirely no return on investment. It begs the question as to why students attend college or undertake degrees they know have a lesser earning potential. I believe they do so because it sets them apart from high school graduates. A college degree is more favorable to employers than a high school diploma. Using this logic, I concur with Bryan Caplan on his sentiments that the earning potential from college is due to signaling to potential employers that graduates can commit to a task over a multiyear period, rather than the additional knowledge gained during the educational period.

According to Caplan, college graduates made 83% more than high school graduates in 2011 (Roberts, 2006-2021). This figure was in stark contrast to the 35 or 40 % witnessed 40 years prior, in 1975. Safe to say, the figure had doubled since then, showing a significant change over time. Psychological changes in the economy are responsible for this change. Specifically, these psychological changes increased the need for a college education. Such psychological changes held by economists include that schools teach thinking, reasoning, and technical skills relevant to the job market (Roberts, 2006-2021). Globalization reinforced these ideas because the technological advancements and global market that accompanied it required people to have such skills. While Caplan agrees with this explanation, he maintains that it is exaggerated and that there is more to the story (Roberts, 2006-2021).

In the discussion about college premium, Roberts notices the heterogeneity of the variables involved that make this figure problematic. The variables, in this case, are college attendance and the assumption that everybody graduated. He notes that people are different, and using the average to measure return on investment is not meaningful (Roberts, 2006-2021). The figure tells us that students who graduate have more earning potential than those who merely attend college but fail to finish. We can deduce that the actual premium may be lower if more variables were factored in, such as the return on investment for those students who attend and are closer to graduating, even when they ultimately fail to do so.

Caplan analogizes the return to education with both marriage and bank loans. He notes there are benefits to being married, and those who engage in it are committed, mature, and ready to settle down. An immature and impulsive person who wants to get married to reap its benefits may fail to do so because they are not adequately prepared (Roberts, 2006-2021). Similarly, in education, students that go into college prepared to work hard and graduate reap the actual rewards of a college education. On the other hand, ill-prepared students or those lacking the ability to finish reap lesser rewards. In the analogy of bank loans, Caplan explains that default rates diminish the value of investment returns (Roberts, 2006-2021). He notes that banks need to consider their money from the repaid loans and the money they lose from defaulters. This analogy implies that we need to consider educational investments that fail when analyzing the profitability of investing in education when applied to education.

In the puzzle of why students are happy when their professor cancels a class, someone who believes in the human capital model would be surprised because of the value this theory has placed on education. In their view, the students should be sad about losing an opportunity to increase their knowledge and be more productive. Someone who believes in the signaling model would suggest that the students probably know that missing that class does not affect their future. Only their transcripts matter and an employer would never know they missed a class. I find the signaling model to be more convincing with this example. A single class is not likely to affect an entire grade.

To counter Roberts’ argument about the lack of evidence to convince labor economists about signaling, Caplan says that he shares similar education and labor experience with skeptics of the signaling model (Roberts, 2006-2021). In the example he gave about a conversation with a prominent labor economist, the latter’s banking career did not correspond with what they had learned in school. This implies that they were hired for simply graduating college than having banking skills (Roberts, 2006-2021). Their rejection is strongly justified because of their long-held education association with income. Labor economists believe that higher education levels lead to more income, which is why it is difficult for them to comprehend that higher education content may not be what determines income levels in the labor market. Therefore, it is likely that the labor economists suffer more confirmation bias.

The arms race refers to the competition between nations over who has more weapons and which are more superior. In education, more people are scrambling to get college degrees because of the high return on investment. Individuals with more education are considered superior in the labor market. The cost of educating a single person in society is the social return to education. In this case, it is negative. The more people get a college education, the more it raises competition in the job market at the same level. As more people get a college education, those lacking similar qualifications look bad. I agree that too many people are going to college. The high cost of education and the returns associated with its completion have increased the value of getting a college education. This has increased the number of people going to college. This number includes women whose societal expectations and restrictions have eased over the years, and many are now encouraged to get an education and join the workforce. Further, more money is being poured into education by the government and private entities, encouraging higher enrolment.

I think colleges should offer refunds. The cost of education is already high, yet several reasons should warrant a money-back guarantee. Students need to be assured that what they are spending on education will deliver all they have been promised, including finding jobs. For instance, due to the high number of students enrolled in college, some courses may be unavailable because of over-enrolment, making the stay in school longer (Akers & Butler, 2016). Additionally, a college degree may fail to yield a return on investment, in which case students should be refunded. Students may also not get jobs after graduating, which warrants a refund.

Student loan forgiveness and publicly paid college education will lower the value of a degree. People associate high expenses with quality so subsidies may lower the quality of college degrees. These measures will also encourage more enrolment and further lower the social return to education.

Caplan’s sentiments reinforce my argument that the increase in earning potential from college results from signaling rather than the additional knowledge gained during the educational period. In the conversation, Roberts notes that there have been no parallel educational developments to explain the doubling of earning premium witnessed in college (Roberts, 2006-2021). As Caplan notes in his defense of evidence supporting the signaling model, many jobs do not require specific skills that can only be learned in college (Roberts, 2006-2021). Since some courses offer a limited return on investment, it is safe to say that the knowledge acquired in college education has been overvalued. With more people joining college, there has been an increase in job competition among college graduates. Regardless,  some may argue that a college education offers other benefits such as greater life satisfaction, job security, better health, and opportunities to build professional networks (Kumok & Hahn, 2022).

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