Monday, August 27, 2012

Not enough Vowels or Numbers

Maureen Tcacik wrote

In the years since the Bankruptcy Reform Act passed in 1978, the nominal price of college tuition has risen more than 900 percent. Over the same period the median male income - again, nominally - has risen 165 percent. And since the percentage of the workforce boasting a bachelor’s degree has expanded from less than 20 percent to nearly a third, I don’t have to convince you that the median de facto return on investment on those diplomas has diminished greatly over the same years.

Via Kathleen Geier (too many vowels and too kind to Tcacik -- also I have just read Geier's excerpts).

hink I could maybe be convinced indeed I think that there are some serious calculations of the return on investment in which it has diminished.  But that claim isn't demonstrated by the numbers given in the article, because two key numbers are missing.  One is the effect of a college degree on salaries which has vastly vastly increased since 1978.  The other is the opportunity cost of lost labor income and labor market experience.  The increase in this cost is roughly along the lines of the increase in median wages (but is lower).  The issue is that if A increases proportionally less than B then A+B increases proportionally less than B.  The nominal cost of getting a college degree has *not* increased 9 fold -- in 1978 y far the larger part of the cost was the opportunity cost.  I think this is still more than half.  I think the total cost of tuition fees plus lost earnings plus lost labor market experience has roughly roughly doubled.

The implication of the reference to the fraction with diplomas is clearly that the college/just high school wage differential has declined due to increased supply of college graduates.  But that differential has vastly increased.  It was very low in 1978 (which happens to be the year I went to college).  I wasn't there (didn't take the course) but I know freshmen in introductory economics were told that they would have gotten a better return on the total cost (tuition fees plus lost wages) investing in treasuries  and labor market experience.

This ceased to be true in the 80s with a huge huge increase in the college wage premium.  Salary with a diploma minus salary with just a high school diploma divided by salary with just a high school diploma much much more than doubled.  It remains very high.

Note also that inflation wasn't helping students in 1978.  The high expected inflation lead to high nominal interest rates.  The people who made out like bandits at the banks' expense were people who had borrowed before inflation was high -- basically home owners who signed fixed interest rate 30 year mortgages in 1973 and before.

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