Benefits of a College Degree: Education, Wages & Salary Factors

Introduction: Is a College Degree Worth the Cost?

Recently, students have been paying large sums of money to attend college while earning less upon graduation (Arai, 1998). Such trends have caused many observers to question whether a college degree is a worthwhile investment. College students typically incur the following expenses: supplies such as textbooks, tuition fees, food, and room and board, among others. Supplies, tuition fees, and books are the direct costs of education, while room and board are indirect costs incurred to sustain a basic standard of living during one's studies. Beyond these, opportunity cost is one of the most significant expenses, as students forgo earnings while enrolled in school. Although it is classified as an indirect cost, it accounts for nearly 40% of the total cost of obtaining a college degree (Reynolds et al., 2007).

In addition to the costs students bear directly, a college education is also associated with social costs and non-market costs. Social costs arise from philanthropic contributions and government subsidies. Non-market costs related to college education include job-related stress, marital instability, alienation, and destructive social protests.

Economists have examined the earnings of workers with bachelor's degrees, associate's degrees, and high school diplomas (Reynolds et al., 2007). The findings reveal that, despite its costs, a college degree remains a valuable investment. A college degree is a relatively valued asset even in the face of rising tuition fees, partly because the salaries of Americans without a college education have been falling. The result has been a college wage premium that is currently nearing an all-time high. Reports indicate that between 1980 and 2015, employees with a college degree had annual earnings of roughly $50,000 after adjustment for inflation (Reynolds et al., 2007). Employees with an associate's degree took home approximately $40,000, while those with only a high school diploma were paid around $36,000 (Arai, 1998). Economists project that over the next four decades, employees with a college degree will earn an average of 60% more, and those with an associate's degree an average of 20% more, than high school graduates.

Research indicates that individuals who pursue college studies "may well have aptitudes, skills, and other characteristics that make them different from those who do not go on to college." Such differences help explain why college graduates earn nearly double what non-graduates earn. Nevertheless, even after accounting for the complete set of costs and benefits, an investment in a college education remains a sound economic decision for most students.

These factors are difficult to quantify, partly because a recent Census Bureau report found that the number of American students attending college dropped by nearly half a million between 2011 and 2015 (Reynolds et al., 2007). Despite studies showing a better overall quality of life and higher employment rates for college graduates, recent years have seen a declining trend in the pursuit of higher education. The skyrocketing costs of college, compounded by heightened scrutiny of its value, present a multifaceted issue that lends itself to mathematical modeling.

Earnings Comparisons Across Education Levels

Previously, experts in academia were largely unable to quantify the value of a college education. Interestingly, researchers are now experimenting with new models to assess its value. For instance, Stanford, MIT, and Harvard have moved into the arena of free online coursework, leading to alternative approaches to certifying mastery through massively open online courses (MOOCs). Moreover, the Mozilla Foundation, based in Silicon Valley, has been promoting the concept of open badges, which aims to demonstrate mastery of both informal and formal learning. This presents a significant challenge in rethinking how to rate and rank colleges today. Traditionally, ratings and rankings were based on an unclear combination of hard-to-measure components such as campus-based statistics and institutional reputation — including acceptance rates, endowment sizes, and library resources, among others. The problem is that none of these metrics directly measures student performance once they arrive on campus (Arai, 1998). Furthermore, while a college diploma signals what a person has learned, it does not necessarily indicate the actual expertise and skills the person is prepared to apply.

Performance is commonly used to determine an employee's pay, an approach known as pay-for-performance. If a person is an exceptional performer, salary increments will reflect that, moving the employee toward the higher end of the pay range (Gratz, 2009). Conversely, a low performer may not receive any salary increase. Similarly, when an organization is performing well and follows a profit-sharing structure, workers are likely to benefit from that organizational performance. Beyond individual performance, labor unions are also influential in determining salary increases (Gratz, 2009). Labor unions primarily seek to influence salaries by affecting or regulating the supply of labor in the market. They exercise their influence to secure allowances and higher wages through collective bargaining with management representatives. If collective bargaining does not produce the desired allowances and salary increases, unions may turn to strikes and other actions that restrict the supply of labor.

Supply and demand are additional factors that shape salary levels. A salary can be understood as the price for the services rendered by an employee. Because a company desires those services, it must offer a price that generates an adequate supply of labor — a supply controlled either by a group of employees through unions or by individual workers (Gratz, 2009). The practical implication of this supply-and-demand theory is the concept of the "going wage rate." Generally, when something reduces the supply of labor — such as restrictions imposed by a labor union — companies respond by raising salaries. The reverse situation is expected to result in a reduction of salaries, provided other variables, such as those discussed below, do not intervene.

This section uses a scientific approach to describe how a study would be designed to estimate the effect of education, performance, labor supply, and union membership on wages and earnings. It proposes a hypothesis about the direction and magnitude of these factors and outlines the research methodology.

Variables That Contribute to Higher or Lower Salaries

Research variables: effects of performance, education, and labor supply on salaries.

In the initial stage of the research, the following hypothesis is proposed to characterize employees' salaries in the United States:

Do individuals with more education, higher productivity, and involvement in labor unions earn more money than those with lower performance and less education?

Investigating the effects of performance, education, and labor supply is complicated by the selective distribution of these variables. On average, individuals who exhibit these characteristics tend to have higher aptitude scores, have experienced greater pressure to succeed, and have come from homes with higher socioeconomic status. Because these correlated variables also influence wages, disentangling the impact of the three study variables from individuals' backgrounds will be challenging. While examining the effects of the three variables, the study will control for extraneous influences and consider that other factors could offer alternative explanations for wage increases (Westenholz-Bless & Achola, 2007).