1
Returns to Schooling
Ch 9 pp.297-300, 310-311
Returns to Schooling
•
Is education a good investment? Why?
•
Economists who have asked the question – Is education
a good investment? – have estimated the internal rate of
return to schooling.
•
What does the internal rate of return tell you about
schooling as an investment?
•
How would you measure the internal rate of return to
schooling?
Returns to Schooling
•
Knowing the internal rate of return to schooling
allows us to compare schooling with other
investments.
– If the returns to schooling are higher then the returns
to other investments, then schooling is a good
investment.
– If the returns to schooling are lower, then schooling
may be a bad investment.
– Typical estimates for the returns to schooling for the
average American are between 5 and 12%, which is
similar to stocks, bonds and real estate.
Returns to Schooling
•
Measuring the internal rate of return to schooling is
complicated.
•
Here is a simple way of calculating the returns to
schooling:
– W
C
is the average wages of college graduates.
– W
H
is the average wages of high school graduates.
–
R is the percentage difference in wages for college graduates
versus high school graduates.
•
What is the problem with this estimate?
__
__
^
^
W
C
– W
H
W
H
R =
__
__
__
Returns to Schooling
•
One problem with this estimate is that high school
graduates are
different
from the college graduates.
–
We want to compare what John Smith would make as a high
school graduate to what John Smith would make as a college
graduate.
•
A second problem is that there may be other benefits to
college not accounted for by wages, such as better
working conditions, lower risk of injury or health
problems, better employee benefits, etc.
^
W
C
– W
H
W
H
R =
__
__
__
Conventional Regression Equation
•
Returns to schooling can be estimated in a similar way
using regression analysis.
ln W
i
=
α
+
β
S
i
+
ε
i
W
i
is the wage level of individual i.
S
i
is the number of years of schooling for individual i.
Using the log of wages as the dependent variable means
that the estimate of
β
will be measured in percentage
terms.

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