What are the real returns from a higher education?

Enrico Moretti, 3 November 2008

Despite a large literature documenting the increase in the wage returns from a higher education over the last 30 years, the rate of growth in the number of college graduates in the US is still low relative to earlier periods. While the increase in the return to education is typically measured using nominal wages, the author of CEPR DP6997 looks at housing costs for high school and college graduates and discovers that, when looking at real as opposed to nominal wages, the return to education and the increase in inequality may be smaller than previously thought.

From 1980 to 2000, US college graduates have increasingly concentrated in metropolitan areas characterized by high housing costs. In fact, the difference between the average cost of housing for a college graduate and a high school graduate was 44% in 2000, more than double the 1980 difference.

Using a new Consumer Price Index that allows for geographical differences, the author finds that while the difference between the nominal wage of high school and college graduates increased by 20 percentage points between 1980 and 2000, the difference in real wages increased by only 8 to 10 percentage points.

The author goes on to look at why college graduates tend to live in expensive metropolitan areas. If it is because these areas offer a wider range of amenities (due to a relative increase in the supply of college graduates), then the college graduates may enjoy an increased well-being compared to high school graduates, despite the limited increase in real wage differences. The empirical evidence indicates, however, that it is the demand for skilled workers that brings the college graduates to the metropolitan areas, not the attractiveness of living in a city. This suggests that the increase in well-being inequality between 1980 and 2000 may have been smaller than the increase in nominal wage inequality, and the problem of inequality may be less severe than previously thought.

Summarized by CEPR staff.

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URL: http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=6997.asp
Topics: Education, Labour markets, Poverty and income inequality
Tags: return to education, wage inequality, well-being

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