Opening the doors wider: The economic upside of admitting more students to selective colleges

Over the past half-century, one education trend towers above the rest: Americans are going to college in greater numbers. In 1970, about 1 in 10 adults held a college degree. Today more than a third do. This surge in demand makes economic sense—college offers a sizable payoff in the labor market. Median earnings of workers with a bachelor’s degree are about 70 percent higher than median earnings of workers with a high school diploma alone.

There is an additional incentive for students to attend more selective and higher-resourced schools. Research finds that students who attend selective four-year colleges earn 20 to 30 percent more per year than their peers who attend more inclusive four-year colleges.

Yet as demand for college has climbed, acceptance rates at the most selective schools have moved in the opposite direction. The limited classroom seats mean that many qualified students are shut out.

What if selective public colleges enrolled more students? And not just a few more, but 20 percent more? This question is at the heart of a new working paper by St. Louis Fed System affiliate Oksana Leukhina and co-authors Lutz Hendricks and Tatyana Koreshkova.

A model of college admissions and college choice

To predict college expansion’s effect on the economy, the economists model individual decisions to attend college and how college education translates to employment income.

At first blush, estimating the effect on earnings of college expansion might seem like a simple calculation: College-educated workers earn X on average, noncollege-educated workers earn Y, so if we move folks from one category to the other, aggregate earnings increase by Z.

But that assumes everyone would benefit from a selective college in the same way.

“We need a model because people differ in terms of unobservable characteristics,” said Leukhina. Not everyone who could succeed in college has the opportunity to attend, for instance, and not everyone who enrolls in college graduates. In addition, “some students just may do better in certain types of colleges,” Leukhina said. For instance, high-ability students may thrive in selective colleges while lower-ability students do better at other colleges.

In addition, the model includes features that resonate with the choices and constraints we face in real life. Students differ in their learning ability, test scores, and parents’ income. They don’t know with certainty which school is best for their learning ability, or how attending one school versus another will impact their future earnings. They also have idiosyncratic preferences for certain schools unrelated to their ability or finances—often schools close to home or those attended by parents or friends. “Those preferences are important in explaining why certain people go to certain schools,” Leukhina said.

The real higher education landscape encompasses some 3,500 degree-granting institutions, so to simplify, Leukhina and her co-authors consider four categories of colleges that differ in student test scores, cost, and graduation requirements, summarized in the table. (Expenditures, tuition, and net costs are reported in 2000 dollars.)

The economists use data from the National Longitudinal Survey of Youth to capture real-world values of the variables they include in their model. This survey follows a representative sample of Americans who were born between 1980 and 1984. For each high school graduate, the economists observe their test scores, college attended, net cost of college, student loans, earnings while in college, parental income, parental money transfers, degrees earned, and a time series of earnings after graduation. These detailed data help the economists understand how students are sorting across colleges now, which they use to predict how a change to admissions policies will ripple through college enrollment and then the economy.

The big payoff to more seats at selective colleges

So what happens when top-tier colleges admit 20 percent more students (equivalent to 2 percent of graduating high school students each year)? Unsurprisingly, more students go to top-tier colleges. But because of the complementarity between student and school, it matters which students go.

According to the data, around 70 percent of students in the top quartile of student test scores already enroll in four-year colleges. The main effect of the expansion, the economists predict, would be for students in the second-highest quartile of student test scores. About a third of students in this group do not enroll in college at all, the data show. When admissions expand, the model predicts that a significant share of this group will enroll at Tier 1 colleges. Because these students are similar in ability to previous Tier 1 college students, they perform similarly at college, graduating at rates near 80 percent. The lifetime earnings for a top-tier college graduate are close to 50 percent higher than the lifetime earnings of a noncollege graduate, the economists find. As a result, the expansion of seats at top-tier colleges will increase total earnings in the economy by 0.8 percent. (While some students might “shift up” from a Tier 3 or Tier 2 to a Tier 1 college, this is not a meaningful element to the macro-level outcome.)

“The wage gain is equivalent to increasing consumption every day for the rest of your life by 0.8 percent,” Leukhina explained.

The earnings gains are also considerably higher than the cost of adding the college seats. For their hypothetical scenario, Leukhina and co-authors assume that spending per student stays the same so that the college experience doesn’t degrade. The cost of the 20 percent expansion is about one-eighth of the estimated aggregate earnings gain and could therefore be financed with taxes.

How expansion affects readiness, wages, and the workforce

Giving more students the opportunity to attend top-tier college seems like a pretty good thing. But critics of collegiate expansions point out several concerns. One, they question whether the students who enroll at selective colleges under the expansion will be appropriately prepared for their college experience. Leukhina and her co-authors expect the average learning ability of students admitted to the most selective schools would decline if enrollment were expanded, but only slightly. The new admittees are still high-ability students who were previously excluded due to capacity constraints. As a result, their graduation rates remain high, and any negative effects on the learning of the highest-ability students would be small.

The second concern: Expanding the supply of college graduates could shrink the wage premium that college graduates earn. The principles of supply and demand mean an increase in the supply of college graduates will reduce their wages. The economists calculate that the college wage premium would fall about 4 percent as a result. Recent estimates put that college wage premium at 74 percent—so it remains large even after a 4 percent decline. On the flip side, the decrease in the noncollege-educated workforce should lead to a small increase in their wages.

Furthermore, “a lot of the kids who are constrained by admissions and therefore benefit from expanded capacity at selective college seats tend to come from lower-income families,” Leukhina said. Giving more students from less-well-off backgrounds access to top-tier colleges means their future earnings are less tied to their parents’ earnings, increasing intergenerational mobility.