Tuesday, 17 March 2015

Graph of the week: Returns to education

Is higher education worth it? According to the latest report from PayScale (HT: The Economist), the answer is: it depends on what you study. An obvious answer, but let's look at the data nonetheless:

Source: The Economist
 Here's the main result:
"Engineers and computer scientists do best, earning an impressive 20-year annualised return of 12% on their college fees (the S&P 500 yielded just 7.8%). Engineering graduates from run-of-the-mill colleges do only slightly worse than those from highly selective ones. Business and economics degrees also pay well, delivering a solid 8.7% average return. Courses in the arts or the humanities offer vast spiritual rewards, of course, but less impressive material ones. Some yield negative returns. An arts degree from the Maryland Institute College of Art had a hefty 20-year net negative return of $92,000, for example."
You can check out the distribution of all occupations in more detail on the following link. The data is for US universities.

This is a topic I've covered on several occasions on the blog. Mostly in terms of the new trends in education and how the IT revolution is changing everything, particularly in the demand for (and consequently supply of) jobs. In addition there is an increasing trend of enrollment into college, so that too is placing a dent in demand, and is, in one way, affecting the inequality problem as well.

So what should we conclude from data such as these? Well, most obviously, it's not getting any easier for those studying arts and humanities. Their negative return to education adds to the widening of the inequality gap, particularly if you account for the student loan bubble. To return a student loan once you get a job is hard as it is, imagine how difficult it can be if your return to education is actually negative. 

However, I don't think this situation will persist for too long. The supply and demand of programs in humanities and arts will eventually adjust downwards. As they did so many times before for so many different occupations. As this ineviatble trend keeps on going universities will have to ajdust their supply of such programs and enroll less studnets, or substitute the student intake from arts and humanities with the programs for which the demand is high (or higher). This doesn't mean that there will be no more students studying arts and humanities, it just means there will be less of them since there are less such jobs available. 

Universities and the labor market must work hand in hand. If the demand on the market changes so must the supply of university programs. Otherwise you're only creating a new flock of unemployed, thus adding to the negative picture of the labor market. This is particularly noticable in Europe, whose public universities tend to react even slower to any changes in demand on the labor market. Data like these are important precisely because they show the universities how to adjust the supply of their programs. It's not the only thing they should look at, but it's an important parameter nonetheless. 

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