Yesterday I attended a roundtable discussion on the new Brookings brief, “Should Everyone Go to College?”  The authors, Stephanie Owen and Isabel Sawhill, succinctly document a point that labor economists routinely neglect: there ain’t no such thing as “the” return to education.  This doesn’t merely mean that some people earn a bigger than average return, while others earn a smaller than average return.  The key point is that education’s private payoff predictably varies.

Some of the predictors are common sense: More selective schools and more vocational majors pay more.  Other predictors are a little more surprising: Adjusting for selectivity, public colleges have a higher return than private colleges because private tuition is so much higher.  Low-ranked private colleges offer the worst of both worlds – a low education premium with high tuition:


I’m especially pleased by the fact that Owen and Sawhill take a hard-headed look at drop-out rates.  I’ve long argued that calculating your return to education while ignoring drop-outs is like calculating your return on bonds ignoring defaults.  In both cases, even a small probability of losing your shirt can drastically slash your expected return.  And for most colleges, the drop-out rate is enormous.  How many junk bonds have default rates as awful as those for “competitive” colleges?


Given the power of the sheepskin effect, moreover, you can’t just cavalierly say, “Students who finish half the program still get half the benefit at half the cost.”  No, they don’t.  Drop-outs get less than half the job market benefit of the degree – and unless they perfectly time their premature exit, they pay more more than half the cost of the degree in tuition and foregone wages.

My main complaint about Owen and Sawhill is that (except for brief asides on drop-out rates), they ignore ability bias.  Part of the reason why selective schools and vocational majors appear so lucrative is that their students are exceptionally smart, hard-working, and conformist before they even arrive on campus.  When researchers adjust for ability, they find that returns to education are markedly more uniform than they appear on the surface. 

Defenders of education might be tempted to rejoice, but they should not.  When you adjust for ability, you also find that returns to education are markedly lower than they appear on the surface.  Ignoring preexisting ability doesn’t just lead us to overestimate the earnings gap between engineers and liberal arts majors; it also leads us to overestimate the earnings gap between between engineers, liberal arts majors, and people who skipped college entirely.