University quality and future earnings

I spent a few minutes searching for a free copy of Stacy Berg Dale and Alan B. Krueger’s “Estimating The Payoff To Attending A More Selective College: An Application of Selection On Observable and Unobservables” (NBER Working Paper No. 7322). Finally found it here.

Why am I so interested in this paper? Well, it’s a rare empirical study that attempts to value education AFTER correcting for “selection bias.” To determine the financial value of a university education, you must factor out the impact of two selection biases. First, universities decide whom they want to attend their schools. And, second, students choose which university that accepted them they wish to attend, a decision often influenced by family finances.

Dale and Krueger found that the measured quality of students at the university you attend has little effect on future wages. Paradoxically, what seems to matter much more is the measured quality of students at universities you APPLIED to, even if many of those schools rejected you!

After we adjust for students' unobserved characteristics, our findings cast doubt on the view that school selectivity, as measured by the average SAT score of the freshmen who attend a college, is an important determinant of students' subsequent incomes. Students who attended more selective colleges do not earn more than other students who were accepted and rejected by comparable schools but attended less selective colleges. …[T]he average SAT score of the schools that a student applied to but was rejected from has a stronger effect on the student’s subsequent earnings than the average SAT score of the school the student actually attended.

But money does appear to buy a superior education, at least for the cohort of students studied (who graduated high school in 1972):

The characteristics of schools that influence students' subsequent income appear to be better captured by average tuition costs than by the school’s average SAT score. …[S]tudents who attend colleges with higher average tuition costs tend to earn higher income years later. The internal real rate of return on college tuition… was quite high, in the neighborhood of 16 to 18 percent.

The financial value of university quality is highest “for students from more disadvantaged backgrounds.”

Of course, quality universities also impact students' minds in non-financial ways. If a quality education encourages students to become literature professors rather than bankers, it’s conceivable top universities boost students' earning POTENTIAL more than this study suggests but diminish students' hunger for money. If so, university quality would have little impact on MEASURED income even though it boosts POTENTIAL income substantially.

Posted by James on Monday, September 28, 2009