Learn Some Economics: The Value of an Education from an Elite SchoolPosted: March 21, 2011
We’ve all heard about the benefits of attending an elite (selective) college in the U.S. Aside from the associated prestige and the networking potential, alumni of top-tier colleges earn more on average than alumni from less elite colleges. Even when controlling for key characteristics such as students’ SAT scores and their high school GPAs, a large income gap exists, which leads us to believe that the reason for this gap is pricey elite college education.
Recently, two economists have questioned whether going to Stanford, Yale or a college that is equally selective truly adds value to a student’s future earnings or whether the earnings gap is due to a selection bias (ie. more ambitious and motivated students attend elite schools). Stacy Dale, an economist at Mathematica, and Alan B. Krueger, an economist at Princeton, published a paper in 2002 that estimated the monetary returns to attending an elite college in the U.S. They used data from the College and Beyond (C&B) Survey and the National Longitudinal Survey of the High School Class of 1972 and found that by holding constant non-observable variables (ambition, persistence, confidence), students who graduated from elite schools earned no more in 1995 than students of comparable ability who, although accepted to elite schools, went to less elite schools. Don’t believe me? I explain it more clearly further down the post so keep reading.
In 2011, Dale and Krueger wrote a follow-up to their 2002 paper, entitled Estimating the Return to College Selectivity over the Career Using Administrative Earning Data, which uses updated and more complete data to test this hypothesis again.
Again, the authors used C&B Survey data but this time they linked them to Detailed Earnings Records from the Social Security Administration (SSA). Gathering earnings records from tax data rather than using self-reported earnings, as in their earlier paper, yields a more reliable earnings measure. In the 2011 paper, the authors use data from the 1976 and 1989 cohorts of the C&B Survey to estimate the returns to an elite school education. They are privy to information from the applications and transcripts of 34 colleges and universities, 27 of which agreed to have their data used for this follow-up study. The authors were able to follow graduates in the 1989 cohort for 14 years after graduation and the 1976 cohort from 1983 to 2007.
When the authors took into account common characteristics such as race, sex, SAT scores and high school GPA, they found that the value of an elite school education was equal to a six-percent increase in earnings within each of the two cohorts. This result is what we already know. However, there is something missing in this standard economic model, which the authors address. SAT scores and high school GPA do not entirely capture student qualities such as ambition, perseverance, motivation, confidence, etc. Yet, these characteristics lead students to apply to elite schools and are rewarded in the labour market. To measure these unobservable characteristics, the authors use the average SAT score of the school to which they applied. The authors are therefore assuming that “students signal their potential ability, motivation and ambition by the choice of schools they apply to” as well as the number of applications they submit.
When these unobserved qualities are considered and controlled for, the estimated value of an elite college education falls dramatically to effectively zero for graduates of both the 1976 and 1989 cohorts. How should you interpret this? Think of a smart high school senior who is sufficiently confident and ambitious to apply to a school like Princeton. Regardless of whether he is accepted by or attends Princeton, these findings predict that he will earn the same income as an equally smart and ambitious high school senior who does go on to study at Princeton. Where the former student does or does not obtain his college degree is not an indicator of how successful he will be. The true indicators are his intelligence, confidence, ambition, etc.
There were notable exceptions to these findings for subgroups in the 1989 cohort. The authors found that school selection significantly increased future earnings among minorities such as blacks, Hispanics and students who came from less-educated or low-income families. These large income gains potentially arose from the increased networking opportunities presented to these students at elite colleges.
One caveat to these findings is that the 27 colleges and universities in the dataset are not a nationally-representative subset of colleges and universities in the U.S.