How large are returns to schooling? Hint:

money isn't everything

Philip Oreopoulos and Kjell G. SalvanesSeptember 2009

[ ]Returns to education

Economic returns (schooling as a financial investment):

Private: higher wages (7-12% more), more opportunity for consumption

Public*: economic growth

Non economic returns: Public*: reduction of threats to security, participation

in public life Private: schooling affects lifetime well-being of

individuals (self-reported happiness)

* constitute strong incentives to the public funding of education.

After conditioning for income the relationship does not disappear.Schooling affects individual well-being through many additional channels other than through income.

Aim of the paper: to test the theoretical and empirical links between schooling and non-pecuniary outcomes

[ ]Returns in the labour market

Fringe benefits: pension contributions, paid vacations, stock options.

More rewarding jobs: sense of accomplishment, autonomy and social

interactions (O*NET data) occupational prestige job satisfaction job security (in addition to workers earnings, lead

to depression and low self esteem).

[ ]Returns outside the labour market

Critical thinking and social skills (strongly and positively correlated with schooling/causation not clear). Two models:

Productive efficiency model: skills act as technology shocks (multitasking).

Allocative efficiency models: individuals with better skills make better decisions.

Examples: Good health: due to healthy habits and healthy activities.

Faster response to new medical information for those with more schooling (allocative efficiency hp.).

Better (and more stable) marriages: schooled people more appealing in competitive marriage markets, critical thinking and social skills crucial in managing the marriage (lower divorce rates)

Higher children development and social-economic success throughout life (persists also after conditioning on income, therefore not due only to resources): parenting style differs by school attainment: determinant for children's cognitive development

[ ]Returns outside the labour market II

[ ]Effects on preferences

Schooling may change people's preferences (provides information on new opportunities for consumption or develops patience).

Enhances students' attention to the future: change in time preferences. Strongly related to the reduction of risky behaviours, such as teen fertility and crime activity.

]Schooling fosters trust, which improves social interaction and community involvement.

Causal relationship: relative reasons (ones' social status becomes higher than the other's), additive reasons (teaches people how to interact successfully), super additive reasons (everyone becomes more trusting).

[ ]Effects on preferences II

[ ]Negative non-pecuniary returns

Added stress: stress hormones are negatively associated with schooling and income (higher pressure offset by better health and social support or access to commodities which help saving time)

Constraints on time

[ ]Schooling as consumption

Schooling normally considered in economic theory as an opportunity cost (wage a student does not earn while schooling) or as a psychic cost (effort a student has to make in order to get education).

But student's life can also be seen as a consumption good.

Evidence: students' enrollment decisions (increase in colleges with better sport equipments and better social life, controlled for the academic ranking)

[ ]Measurement issues

Heterogeneity: difficult to assess impacts for sub-groups (problem partly resolved by dividing results by groups).

Schooling versus education: years of schooling are not particularly good measures of education (limited information on what it is about schooling that produces pecuniary and non pecuniary returns). Over-reliance on quantitative- and qualification-based measures (data readily available), but poor information on the quality of education.

Signalling skills through schooling: difficult to distinguish, but seems not so evident in non-pecuniary benefits (especially in the case of diverse individual attitudes).

[ ]Measurement issues II

Causality: difficult to estimate causal effects (schooling may be spuriously correlated to particular outcomes). Problem often resolved in two ways:

1. using syblings and twins with different levels of schooling: ability and family background are kept constant.

2. using data related to policy changes which affect schooling attainment (for example minimum schooling legislation).

[ ]Measurement issues III

Measurement issues

[ ]Conclusions

Why so much difference in schooling attainment if going to school is so convenient?

Financial obstacles Students are shortsighted