2011-2012 Essay Contest

The Economics of Education

Like many other high school students, you are probably weighing your options for what to do after graduation. Young people have many choices to make at this time in their lives—whether to attend college versus technical school or consider other post-secondary education options, what to study, where to study, whether to continue formal education at all or just start working. This can be a difficult decision, and possibly the most important one you’ll make in your life so far.

There are plenty of factors to weigh in making these choices. Family and social expectations are important and, of course, what would be the most fun. But the decision is fundamentally an economic one. Going to school can be quite costly (even if you are fortunate enough not to pay out of pocket), and it is a major investment in your future. Exactly how to weigh these considerations is different for everyone, but the decision has tremendous significance both for individuals and for society as a whole.

That’s why the Federal Reserve Bank of Minneapolis, for its 24th Annual Student Essay Contest, is asking students, “What is the value of higher education?”

This primer is intended to get students thinking about the topic. It is far from the last word on the economics of education, but rather is a stepping-off point for students who want to write a good essay.

Costs

The cost of higher education might seem obvious. Tuition rates for colleges and vocational schools are significant and have been steadily rising over time at rates faster than the prices for goods and services overall. This alone is a substantial cost, especially considering that many students finance their education with loans they spend years to pay off.

But economics teaches us that the full cost of anything also includes the alternatives that must be given up for it. And the opportunity costs of going to school for two years, four years or even longer can be very high. The most obvious cost is the income you won’t earn while attending college. Leisure is valuable too, even if it is harder to put a price on it. Spending time in class, studying and doing homework can mean sacrificing a lot of leisure.

Considering these forgone options along with tuition might make higher education seem extremely costly. A successful essay must weigh all the costs incurred in getting an education, but a proper analysis also considers the benefits.

Benefits

Economics tells us that a rational person considers the costs and benefits of a choice not just now, but in the future as well. The benefits of higher education are many. For one, those with degrees beyond high school earn more on average than those with less education. Over a lifetime, this adds up to a big difference, even if young people who start working immediately after high school start earning more right away.

The extra income earned by people with higher degrees is relatively easy to measure. But other benefits to education aren’t as straightforward. The value of learning for its own sake, of satisfying your curiosity and broadening your horizons, and the value of the “college experience” as a period of personal growth and fun are very real for students who can afford them. It’s not as easy to put a price on such intangible things, but their value can be measured.

The price of tuition and the opportunity costs are ways to measure the value of education. People are willing to forego immediate income and pay for school for a higher future income and for other reasons as well. By looking at the costs relative to future benefits, we can quantify the value of those other reasons.

For example, you might expect to earn more by earning a degree in engineering than in philosophy. Nonetheless, you might choose to study philosophy because you prefer it to engineering. The difference between your expected earnings as an engineer and as a philosopher is a way of measuring how much you prefer philosophy. This example leads to another angle on the essay question: People are all different.

Diversity

On a certain level, economists view everyone as similar, in that they are all trying to achieve the highest standard of living they can, subject to their budgets and other constraints. People make choices that they believe will maximize their well-being. However, people vary greatly in the choices available to them, and these differences lead to individual choices and outcomes that are far from similar.

One obvious difference is in budgets: Some can much more easily afford a higher education than others. Beyond that, academic performance in high school and on entrance exams determines what post-secondary options are possible. Many other factors narrow oth array of educational choices, such as family expectations and geographic location. As in the case of education’s benefits, some of these constraints might not have a dollar value, but they are still economic factors.

People also differ in their interests and desires, and this will affect the education choices they make, as in the example of philosophy versus engineering. But even if everyone had the same preferences, the differences in their budgets and feasible alternatives would lead to big differences in their choices. Because not everyone has easy access to higher education, the issue of how it should be financed is very important.

Social Benefits and Costs?

An angle you might consider on this question is the benefits higher education produces for society. Many economists believe that in addition to the good an education does for students, it also does good for others—their communities, their employers or people employed by them, for example. An education could provide the skills to develop medicines that save lives or to produce great works of art that enrich lives. There might even be benefits for democratic society as a whole, if education makes people better citizens.

The existence of such positive externalities is reassuring, but it also poses a challenge. Because these benefits go to others far removed from your educational decisions, they aren’t accounted for by you, by prospective schools or by those who might finance your education. The private market, which often allocates resources efficiently, might underprovide education. That is why governments usually play a large role in providing and financing education.

But subsidies for education have costs as well. There are many questions about the proper amount of subsidies, alternative uses for those funds and possible unintended consequences of those policies. If you decide to examine this issue in your essay, you must attempt to account for the social benefits and costs comprehensively, just as you would if you focused on the individual decision.

The value of higher education is a very important question for each of you individually and collectively. Economic analysis is crucial to understanding these issues, whether you are a policymaker or a prospective student. Carefully examining the economics of this question will lead not only to a winning essay (one that will provide you with money to use for your own education), but also to an interesting contribution that sheds light on difficult problems. Good luck!


If you have any questions, contact Joe Mahon at Joseph.Mahon@mpls.frb.org or call 612-204-5254.

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