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Rate of Return to Education Investments: Economic and Social. Paul Sommers, Seattle University A Progress Report from NORED, June 2006. National Data on Educational Attainment and Earnings. Source: Hill et al. The value of higher education 2003, p. 14.

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Rate of return to education investments economic and social l.jpg

Rate of Return to Education Investments: Economic and Social

Paul Sommers, Seattle University

A Progress Report from NORED, June 2006


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National Data on Educational Attainment and Earnings

Source: Hill et al. The value of higher education2003, p. 14


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Rate of Return to College Education Increased over Last Two Decades

Source: Hill et al. The value of higher education , 2003, p. 15


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A Note on “Credentialism” Decades

  • Several distinguished economists offered prognostications of and over-supply of college graduates and a likely reduction in earnings of those with BAs or higher in the mid-1970s

    • Margaret Gordon, Higher Education and the Labor Market, 1974

    • Richard Freeman, The Overeducated American, 1976

  • A worse prediction could not have been made! The historical record shows just the opposite – higher wages for college graduates over time, and a larger gap between BA and higher wages vis á vis lower levels of education attainment

  • This should give some pause concerning the idea that we are now approximately in supply/demand balance on BA level degree production


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Voluminous literature on RofR to Education in Many Countries Decades

Psacharopoulos & Patrinos

(2004) review studies from 73 countries

“Social” return in this figure just takes into account public investments in education

Spillover, or externality effects are discussed but no estimates of these effects are provided


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Costs vs. Benefits of a BA Degree Decades

Source: Hill et al. The value of higher education, p. 17


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Other Studies Decades

  • Kentucky study (Education and the Common Good, 2001) compares BA holders to high school graduates

    • $357K increase in lifetime earnings for men and $156K for women;

    • Higher levels of income tax contributions by college grads;

    • More voting, less smoking, less welfare use, more volunteer hours


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Other Studies Decades

  • California study (Return on Investment, 2005) finds a doubling of income, comparing college grads to high school grads, and notes significant differences by race/ethnicity/immigrants


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Other Studies Decades

  • Monk-Turner (1994) found a 7.9% return by age 27 to students who started college at a 4-year institution, and a 5.4% return to similarly aged students who started at a community college.

  • Most rate of return estimates have gone up in recent years, but this is the only study comparing 2- and 4- year degree holders


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Training Programs for Dislocated Workers and Adults Lacking Basic Education

  • Jacobson et al. (2004, 2005)

    • Additional year of college is associated with 7% higher future earnings

    • Opportunity costs are high for workers over 35 who may be better off just going back to work rather than pursuing higher education

    • Study uses administrative data from Washington


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Training Programs for Dislocated Workers and Adults Lacking Basic Education

  • Hollenbeck and co-authors (2003) provide preliminary results from studies in 6 states incl. Washington using administrative data

    • Small positive cost-benefit results in most states; negative impacts in one

  • Hollenbeck (2004) reports results only from Washington

    • 5-10 percent earnings increases for job training participants compared to a similar group of dislocated workers who just went back to work


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Training Programs for Dislocated Workers and Adults Lacking Basic Education

  • Prince and Jenkins (2005) find a “tipping point” – ABE and ESL students who go on to complete at least a year of college credit courses had earnings $1700-2500 higher than students who completed 10 or fewer college credits after ABE/ESL training

    • I-BEST program devised to keep these students involved and participating long enough to get past this tipping point


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Types of Social Returns Basic Education

  • Spillover or externality impacts (Moretti; Hill et al.) more degreed individuals in a regional economy  higher wages for everyone because productivity goes up, technology development and adoption increase, and positive feedback loops put the region on a faster growth track

  • Non-monetized benefits – less crime, more civic participation, lower dependence on safety nets, better health outcomes, more charitable giving


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Moretti’s externality study Basic Education

  • Cross sectional data from 282 cities at three points in time (Census years) with lots of control variables to take into account many potential competing explanations, PLUS a longitudinal study of 6,791 individuals from 201 cities

  • Results, consistent across both bodies of data, suggest that a 1% increase in college grads in a city result in wage increases of:

    • 1.9% for workers who did not graduate from high school

    • 1.6% for high school grads in the city

    • 0.4% for college grads


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Crime Basic Education

  • Lochner & Moretti (2003) study uses multiple data sets and carefully designed statistical analyses to explore the relationship between education and crime

  • Findings:

    • 1% increase in high school graduation rates nationally would save $1.4 billion, about $2100 per high school graduate

    • This social return is 14-26% of the private return to the high school graduates, or $53 to 100 billion

    • Authors compare these benefits to 1990 average national cost of a year of high school of $6,000


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Early Childhood Interventions Basic Education

  • Reynolds et al. (2003) longitudinal study in Chicago claims a $7.14 benefit to society for every $1 invested in an 18 year longitudinal study of children in Chicago Child Parent Centers (n=989) vs. a comparison group (n=550)

  • Chicago Child Parent Centers emphasize early intervention, parent involvement, structured language/basic skills learning, health and social services, and program continuity into early school years

    • Benefits include stronger parental support, lower juvenile delinquency and greater educational achievement by age 21; dollar estimates came from costing out lower justice system and remedial education costs


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Early Childhood Interventions Basic Education

  • Rolnick and Grunewald report on the Perry Pre-School program in Ypsilanti, MI

  • Outcomes for 123 children in pre-school program, relative to a comparison group

  • Perry Pre-School participants were:

    • more likely to graduate from high school,

    • more likely to earn more than $2,000 per month, and

    • less likely to have been incarcerated as of age 27;

  • Rolnick and Grunewald calculate a 16% real rate of return on investment, with most of the benefits going to the public at large (e.g., lower justice system costs)


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Early Childhood Interventions Basic Education

  • Lynch (2004) provides cost estimates for a national pre-school program for all 3-4 year olds in poor families

    • Estimated cost $20B in first year and tapering off thereafter as savings kick in (children do better in school; later on less crime, more employment in well paying jobs and less use of social assistance)

    • New tax revenues would offset costs by year 17


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Early Childhood Interventions vs. Higher Education Investments

  • Higher education returns may be largely private returns to the student who earns more after completing college

  • Early childhood studies emphasize social returns including lower costs in K-12 education because these children are better prepared for school, as well as lower criminal justice and social assistance system costs

  • Higher education also impacts criminal justice and social assistance costs


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The College Board: Investments“Education Pays”

Statistical correlation is clear, but no controls for causality problems


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The College Board: Investments“Education Pays”


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The College Board: Investments“Education Pays”


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The College Board: Investments“Education Pays”


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The College Board: Investments“Education Pays”


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The College Board: Investments“Education Pays”

  • Additional findings – as education level increases:

    • Volunteerism increases

    • Voting rates are higher

    • Children have better learning behavior and cognitive skills

    • More likely to donate blood

    • Social program expenditures are lower


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Source: Investments

Tom Mortinson

Post-Secondary

Education website


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Conclusions Investments

  • Convincing evidence from well crafted studies published in leading journals:

    • Early childhood programs reduce K-12 costs and result in higher earnings

    • A high and increasing rate of return to earning a bachelors or graduate degree

    • A substantial return for an associates degree or technical program certificate

    • Higher earnings  higher tax revenues and lower social assistance costs

  • Solid evidence from well done studies using WA admin data

    • Positive returns for dislocated worker and ABE/ESL if they go on to take at least a year of college credit courses

    • Opportunity costs reduce overall return estimates especially for older workers


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Conclusions Investments

  • Social returns have been demonstrated in well crafted studies

    • Less crime

    • Spillover impacts on non-degreed workforce as degreed workforce grows

    • Productivity impacts that turn into higher wages

  • Correlational studies not proving causality but suggesting additional impacts

    • Better health/less smoking, more voting, more volunteerism, etc., etc.


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Conclusions Investments

  • Correlations do not prove causation and extrapolation from these studies to potential returns on investments this state might make must be done judiciously!

  • Those who benefit from higher education may differ from those that have historically not participated in ways for which even the best of studies may not have devised good controls


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Potential areas for investment suggested by this literature Investments

  • Pre-school programs

  • Plug leaks in education system

  • Expand access to higher education in low participation rate counties and among minorities

  • Displaced worker and adult education programs

  • Labor market has an enduring appetite for better educated workers – actions to “feed” that appetite will have many positive impacts


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