How large are returns to schooling? Hint: money isn't everything

1. How large are returns to schooling? Hint: money isn't everything Philip Oreopoulos and Kjell G. Salvanes September 2009

2. ] [ Returns to education Economic returns (schooling as a financial investment): • Private: higher wages (7-12% more), more opportunity for consumption • Public*: economic growth Non economic returns: • Public*: reduction of threats to security, participation in public life • Private: schooling affects lifetime well-being of individuals (self-reported happiness) * constitute strong incentives to the public funding of education.

3. After conditioning for income the relationship does not disappear. Schooling affects individual well-being through many additional channels other than through income. Aim of the paper: to test the theoretical and empirical links between schooling and non-pecuniary outcomes

4. ] [ Returns in the labour market Fringe benefits: pension contributions, paid vacations, stock options. More rewarding jobs: • sense of accomplishment, autonomy and social interactions (O*NET data) • occupational prestige • job satisfaction • job security (in addition to workers earnings, lead to depression and low self esteem).

6. ] [ Returns outside the labour market Critical thinking and social skills (strongly and positively correlated with schooling/causation not clear). Two models: • Productive efficiency model:skills act as technology shocks (multitasking). • Allocative efficiency models: individuals with better skills make better decisions. Examples: • Good health: due to healthy habits and healthy activities. Faster response to new medical information for those with more schooling (allocative efficiency hp.). • Better (and more stable) marriages: schooled people more appealing in competitive marriage markets, critical thinking and social skills crucial in managing the marriage (lower divorce rates)

7. ] [ Returns outside the labour market II • Higher children development and social-economic success throughout life (persists also after conditioning on income, therefore not due only to resources): parenting style differs by school attainment: determinant for children's cognitive development

8. ] [ Effects on preferences Schooling may change people's preferences (provides information on new opportunities for consumption or develops patience). Enhances students' attention to the future: change in time preferences. Strongly related to the reduction of risky behaviours, such as teen fertility and crime activity.

9. ] ] [ Effects on preferences II Schooling fosters trust, which improves social interaction and community involvement. • Causal relationship: relative reasons (ones' social status becomes higher than the other's), additive reasons (teaches people how to interact successfully), super additive reasons (everyone becomes more trusting).

10. ] [ Negative non-pecuniary returns • Added stress: stress hormones are negatively associated with schooling and income (higher pressure offset by better health and social support or access to commodities which help saving time) • Constraints on time

11. ] [ Schooling as consumption Schooling normally considered in economic theory as an opportunity cost (wage a student does not earn while schooling) or as a psychic cost (effort a student has to make in order to get education). But student's life can also be seen as a consumption good. • Evidence: students' enrollment decisions (increase in colleges with better sport equipments and better social life, controlled for the academic ranking)

12. ] [ Measurement issues • Heterogeneity: difficult to assess impacts for sub-groups (problem partly resolved by dividing results by groups). • Schooling versus education: years of schooling are not particularly good measures of education (limited information on what it is about schooling that produces pecuniary and non pecuniary returns). Over-reliance on quantitative- and qualification-based measures (data readily available), but poor information on the quality of education. • Signalling skills through schooling: difficult to distinguish, but seems not so evident in non-pecuniary benefits (especially in the case of diverse individual attitudes).

13. ] [ Measurement issues II • Causality: difficult to estimate causal effects (schooling may be spuriously correlated to particular outcomes). Problem often resolved in two ways: 1. using syblings and twins with different levels of schooling: ability and family background are kept constant. 2. using data related to policy changes which affect schooling attainment (for example minimum schooling legislation).

14. ] [ Measurement issues III

15. Measurement issues

16. ] [ Conclusions Why so much difference in schooling attainment if going to school is so convenient? • Financial obstacles • Students are shortsighted