Deconstructing the college premium – it depends on major and ability bias

by Grace

The college premium is derived from several elements.

The college premium of better pay and job prospects should be considered as a composite of several elements, not all directly resulting from actual college attendance.  The premium can be affected by the amount of genuine learning (influenced by major and institution), ability bias, signaling capacity, and other factors.  A hard-working computer science MIT graduate with a 130 IQ will likely enjoy a higher college premium  than a lackadaisical ethnic studies major with a 100 IQ who graduated from a directional state college.  Even if neither attended college, the MIT-wannabee would still probably out-earn the second individual.  [Edited to add that these comments refer to actual dollar amounts.  In terms of percentages, I can see how the slacker kid could have a higher college premium.]

Bryan Caplan has written extensively on this topic, including a recent post about how ‘stronger students typically choose harder – and more lucrative – majors’.

Economists usually talk about the college premium, but the college premium heavily depends on your major.  At the same time, though, stronger students typically choose harder – and more lucrative – majors.  Thus, the college premium is doubly infected by ability bias: People who would have made more money anyway are more likely to go to college, and college graduates who would have made more money anyway are more likely to select demanding majors.

Incorporating this information, Caplan calculated the premium for various majors.  Here are the top five, broken down by gender.

EARNINGS COMPARED TO H.S. GRADS

Major Males Females
Electrical engineering +63% +72%
Computer Science +61% +63%
Mechanical engineering +61% +72%
Finance +61% +55%
Economics +60% +59%


While Caplan admits these figures “lack the precision of Planck’s constant”, he considers them better than much of the information typically available to high school seniors.  Although as I look at this table, I’m not exactly sure how I would use the data in advising a particular student.  He also notes the relatively high rank of economics,  confirming his belief that “Economics is the highest-paid of all the easy majors.”

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2 Comments to “Deconstructing the college premium – it depends on major and ability bias”

  1. “Mainly, there is a premium paid for quantitative skills.”

    Very good point. Made me think of this:

    ‘math skills are correlated to higher earnings’ https://costofcollege.wordpress.com/2012/04/30/math-skills-are-correlated-to-higher-earnings/

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  2. I read about economics graduates (probably from schools that focus on stronger quantativie skills) doing very well being hired in the “finance” or other general business jobs, with just bachelor’s degrees. Perhaps part of the rosy picture for economics majors are the many possible avenues to go after undergrad.

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