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a blog from young economists at Nova SBE

Is Higher Education still worth it?


As the consequences of the global recession and the debt crises in the western countries continue to affect national economies and labor markets, the importance of higher education has been questioned by some citizens. A report by McKinsey concluded that 41% of graduates from the USA’s top colleges could not find jobs in their chosen field and 50% would choose today a different major or school; while Chegg, a company that provides online help to students and collaborated with the study added that only 39% of the managers say that students are ready for the workforce. In several European countries, youth unemployment raised sharply, even between among those with higher education, leading to the belief that the returns for investing in higher education are not as high as in the past (i.). For these reasons, some economists have asserted the existence of a “bubble in higher education”, meaning that the comparatively high amounts paid by students to get a college degree (principally for US) do not correspond to future employment prospects and wages of these students. (ii.)

The value of a degree boils down to supply and demand. The difference between average pay for university graduates and those with secondary-school degrees is called the “college wage premium”. When firms need more skilled workers their demand for university graduates grows, and the premium rises. When the supply of graduated workers grows faster than the supply of less-educated workers, the premium will stabilize or decrease.

In the last century, in rich countries firms demanded more and more of the best-educated workers, but recently the increase in demand has been lower than the increase in supply. In the case of OECD countries, and according to data from the World Bank, the percentage of enrollment rates on tertiary education passed from 51% in 2000 to 71% in 2012. So rapid was the change in labor markets that they became “saturated” with new graduates, consequently the premium has been decreasing.

Also, students are paying more for education and borrowing more to do so (from 1993 to 2012 the share of American graduates taking student loans increased 25%), and the big problem is that returns on investment in education are also getting more volatile. A study from Payscale, a research firm, concluded that the returns vary according to institution and degree. They estimated the return by taking into account the investment (the cost of the degree after financial aid) and how much they earn today. Graduating in great universities like Caltech and MIT creates a 30-year return on a bachelor degree of about $2,000,000, while attending in not-so-good schools like Valley Forge Christian College made $148,000 worse off graduates. The return is estimated in the case of degrees, engineering is always a good bet; an engineer from the U. C. Berkeley can expect to be $1,100,000 better off after 20 years than someone that never went to college, even the least lucrative courses generated a 20-year return of $500,000; in the case of arts and humanities the returns are much more varied, an art degree from Columbia pays off generously while an arts graduate from Murray State University in Kentucky can expect to make $147,000 less over 20 years than a high school graduate, after paying for his graduation. A caveat in this study is that they compared the graduate’s earnings with the earnings of people that just finish the secondary instead of graduate’s earnings if they did not have done college, overstating the true value; some people did not go to college just because they did not have enough grades to get in, so the premium that graduates earn can be higher because they are smarter on average than non-graduates. (iii.)

As more and more people are completing higher education some students are now investing in higher education not to learn but to signal to firms that they are as good as the others that went to the university, this is still rational but certainly not efficient. Students need to start to look to studies like Payscale and make more informed choices as returns to higher education are getting more volatile.

Marli Fernandes


Author: studentnovasbe

Master student in Nova Sbe

3 thoughts on “Is Higher Education still worth it?

  1. Such a question arises mostly because we are facing a crisis and no one sees a way out of it. But what will happen when the crisis is over? It is important to look at the other side of the coin and try to abstract from the fact that we are living a crisis because in such periods the true value of education, for instance, seems to be underestimated.
    Professor William Zumeta, Professor of Educational Leadership & Policy Studies of Evans School of Public Affairs at University of Washington-Seattle, mentioned that “future is likely to be, if anything, more favorable to the well educated than recent decades have been”. This is so because today we live in a “knowledge-based modern economy”. Hence, good jobs today require both skills and capability to adjust rapidly to changes. And, indeed, Education helps us to develop these kinds of skills.
    However, the Professor also mentioned that not everyone needs a “graduate degree to prosper” since there are still “plenty of middle skilled jobs that can be filled by people with good postsecondary training and credentials that can be completed in one or two years”.
    So, probably the problem with higher education is not that it is not worth it but, indeed, that many people just want a “signal” and this “signal” is not working properly because there are too many people acquiring it when they should instead be doing only training in some specific field.


  2. For the case of the USA, which seems to be the main focus of this blog post, it is interesting that even though there seems to be evidence that there is an oversupply of college/university educated workers, particularly from less reputed institutions, the bubble doesn’t seem to be “bursting” as fast as one would expect.
    Some suggest that the American market for higher education is being highly distorted by government subsidies and that this explains why some institutions and degrees “survive” even though they are unsustainable in the long run. However, it is relevant to consider that the problem might be actually originating in the private sector. It is possible that American higher education cost disease is really the result of a reckless inflation of college tuitions which is causing a mounting of student debt, distorting career choices and preventing students from low socioeconomic backgrounds (that are not scholars) from entering the market. The implications of these distortions might be worse than the post suggests.


  3. It is sad to read that my future job and somewhere, my future life depend on the job market. If companies look for my profile, for my educational background, and if by any chance, I am the only one on the supply market to have these characteristics, I will certainly be a happy winner. But what if firms’ needs are not matching my skills and motivations?
    It sounds like I have to anticipate well the future job market and make the good calculations today for good returns tomorrow. But, honestly, how to make it right while the world is changing, the economies and the societies are being transformed by some bubbles, some crisis and other new Asian emerging economic leaders? I may not be sure of what job I will do within ten-twenty-thirty-forty years (because, let’s be honest, I’m part of the confused generation that may have to work until 90 years old, with or without retirement if not dead by work or ill by society) but I am sure I’ll need to be flexible to what the world is ready to offer me.
    The most reasonable plan, I think, is to stick with I want to be as a person, and to be honest with what I am truly skilled with. From that, I think I should be the most well-armed to face the variations, the uncertainty and the changes that will come at the job market’s doors.