Russ: How much more do college graduates earn relative to high school graduates, and how has
that return changed over time?
Bryan Caplan: People who go to college are not the same [as others] even when they start. So, the
kind of person who goes to college is different at the beginning. And there are a lot of reasons to
think that people who are different in the beginning would have made more money even if they
hadn't gone to college. The most obvious one is that people who go to college are generally smarter.
They were smarter before they started.
I take a look at what people actually study in school, and I see very little evidence that most students
are acquiring any technical skills. And also, surprisingly, when I read educational psychology, there is
a lot of question about whether college students are actually learning much in the way of thinking
skills, either.
Russ: What about for someone who has attended college but not graduated? What's the premium
for that?
Bryan Caplan: That is about 10%. A lot less. … A lot of what's going on is that for many people,
graduation is hard. It's actually hard to pass the classes, hard to keep doing it. The kind of people
who write about education are people who have had a fantastic educational experience. They've
always been doing well in class; they've been getting their heads patted from kindergarten on. And
not only did they have no trouble finishing, but the people they know had no trouble finishing. But
most people have a lot of trouble finishing. So, right now, the 5-year graduation rate for 4-year
college is only about 55%. So like 45% fall by the wayside during this period. As to why exactly it is
they don't finish, part of it is probably just the material is too difficult. A lot of it is that people get
really bored. And then, another point is that even if you wouldn't actually fail out, it's just very
discouraging to constantly receive Cs or worse. Even if you could get your 4-year college degree with
Cs and get something out of the labor market, it's hard to spend four more years being told that you
are at the bottom of the barrel.
Bryan Caplan: If you were to go and put in 3 or 4 years and then not finish, you might only be getting
some of this 10% premium, and that is not very good for all those years you are putting in. It really
doesn't pay very much. Here's the key thing to keep in mind. When we say that there's an average
graduation rate of like 55%, a lot of that is predictable. So if you have great SAT (Standardized
Admission Test) scores, if you are great in high school, then your graduation rate is probably closer
to 90 or 95%. On the other hand, if you were in the bottom quarter of your high school class then
you are talking about maybe a 10% chance of finishing, something along those lines. So even if you
aren't a great student, doing the math actually eventually becomes fairly easy—yeah, I can get an
83% if I finish but I only have a 10% chance of doing that. Even if you don't think in such complex
terms or think so quantitatively, just noticing that people like you almost never finish probably does
discourage a lot of people from trying.
Russ: You write—this was a very nice way of capturing it: "For students in the bottom quartile of
academic ability, paying a year's tuition is almost as foolish as buying 10,000 lottery tickets." Just
that the odds are stacked against them; they have a small likelihood of finishing. Do we know
anything about why those people don't finish? How many of them just were getting good grades and
just decided to give up, versus flunked out? Do we know anything about that. One of the major costs
of college isn't tuition. It's the foregone income that you give up by not working. You don't get that
back, either.
Bryan Caplan: That's absolutely right. You're right that that is more important. One of the things that
I've learned writing the book is that even though list prices for tuition have gone way up, still the
actual tuition for your main 4-year state universities is not that much. After you adjust for all
financial aid and everything else, it's still only in the ballpark of $5000 a year in most places. So
actually the foregone earnings could easily outweigh that by a factor of 3 or 4.
When people talk about education, they assume 100% completion rate. Far better to put in the 50%,
although even better, of course, is to individually tailor the predictions based upon the performance
of the student in high school and SATs and so on, and then you'll see, well for some people it really is
very close to 80%, because they are great students, they always have been, and they almost
certainly are going to graduate. And on the other hand, as we said, for other people, who have
maybe a 10% graduation chance, then they are talking of a real pittance.
Even to say that college graduates get 83% is very misleading. There's a huge range. One of the main
things that matters is your major, where there are your stereotypical high-earning majors, where
you are getting a lot more than that. So that would be engineering, computer science, finance. And
actually economics.
There's a very common view, often associated with David Card and his many students that education
is just as lucrative for high-ability students and low-ability students. The way they reached this
conclusion is basically saying, look, if you take a look at the graduates of college, high-ability
graduates seem to get as large percentage increase in their earnings as low-ability graduates. The
main problem with this, again, is that they are only looking at graduates. If you go and look at the
fact of ability on whether you graduated all, that's the main way where you very clearly see that the
lower-ability students don't get the same return as high-ability students, because they are less likely
to get much of a return at all. So, it's one thing to say, if a low-ability student manages to get to the
finish line then he'll get a big gain. But what are his chances of getting over the finish line? Pretty
bad.
Russ: Let's talk about the underlying explanations for why there is any premium at all. Over the
years, since I've been studying economics, the two approaches that fight against each other are the
human capital model and the signaling model. Talk about what the differences between those two
models are, and which you think has, if you can, more weight than the other.
Bryan Caplan: The human capital model and the signaling model are both stories about how
education successfully increases earnings. They are not disagreeing about whether education
actually raises earnings. Rather they are disagreeing about why. The human capital story says that
you go to school; they actually teach you a bunch of useful jobs skills; you then finish and the labor
market rewards you because you are now able to do more stuff. The signaling model says, no, no,
no, no; that's not what's going on. What's going on is that people go to school; they don't actually
learn a lot of useful stuff; however, the whole educational process filters out the people who
wouldn't have been very good workers. So people who are lower intelligence, lower in work ethic,
lower in conformity—those people tend to not do very well in school. They drop out. They get bad
grades. And that's why the labor market cares. It's not that the school actually transforms you to a
good worker from a bad worker. It's that the schooling, the school puts a little sticker on your
head—you know, Grade A student, Grade B student, Grade C student.
A very simple way of explaining it is think about two different ways to raise the price of a diamond.
One way is by cutting it very beautifully so that it is actually a better diamond. Another way, though,
is you put on that funny monocle thing and you look at it and you appraise it. These are both ways
that you can raise the price of a diamond. So, cutting the diamond can raise the price. But also a very
credible appraisal can raise the price as well. And the human capital story basically says that schools
take these diamonds-in-the-rough and it cuts them very nicely and then that's why they are more
valuable. And signaling says, no, no, no: what's going on is students show up to school basically as
well as they are going to be, and then what the school does is it puts them through a bunch of tests
and it makes them jump through a lot of hoops, and then it certifies them and certifies their quality.
And that's why employers actually care. Now of course, any sensible person will say: Well, there's
some truth to both stories. But, so the real question is not: Is it all human capital or is it all signaling?
The question is: What's the balance? The general view among most active labor economists is that
signaling is basically irrelevant; it's maybe 5%, 10%; it's something that we can pretty much forget
about. My view, though, is signaling is more like 80%
Russ: Let me let the listeners understand why I have a natural skepticism about it. And I think a lot
of labor economists do as well. And the reason is that it's an extremely expensive signal. So, you are
saying, for 4 years, I give up the chance to work; I pay this tuition, whether it's $5000 or $10,000, or
$30,000, or $40,000—at a private university. And for that enormous amount of money, I prove that I
am a good worker and I get a sticker on my head. Wouldn't there be an easier, cheaper way to get
the sticker? If all it's doing is measuring ability, this 4-year slog that's extremely expensive? That's
the best way that people have come up with to get the sticker?
Bryan Caplan: Yes. Now the thing to keep in mind is, there are many different kinds of ability, and
school seems to actually be weeding people out on almost all the ones you can think of. So, it's not
just intelligence. But what if what you are trying to find are workers who are hard-working, and
especially workers who are conformist? Now it is a lot easier to see why does it have to be so
expensive? Suppose that someone came along, here's the way I'm going to certify the people who
are hard-working but it only takes a month. Now, who are the first people who are going to be in line
for this one-month certification? They are going to be people who aren't very hard-working. The
people looking for an easy way out.
Not only can signals be expensive, but they really have to be if there is a valuable prize at the end.
So, think about this. Suppose that somebody came up with a chemical process to make diamonds as
cheaply as plastic. How much longer would people continue to give diamond engagement rings? This
would be the end of it. Why? Because the engagement ring just has to be expensive, otherwise it
does not show commitment.
So, the same thing goes with education. If someone figured out a way to make the current process
happen in a year, this would mean that a whole lot of people would put in a year; they'd finish; and
then it wouldn't really show that much about you. It's got to be a long, drawn-out, painful process or
else it doesn't really separate you from the pack. And according to signaling, that's the key point, is
to separate yourself from the pack.
Russ: I'm curious what evidence—besides armchair theorizing—you point to that labor economists
ignore. That you say is in other fields, etc. For the signaling theory.
Bryan Caplan: So, in terms of the research, one very well-established fact that gets very little play is
what's called the 'Sheepskin Effect'. So, we've sort of been touching on this point on how not
finishing, starting college without finishing seems to raise earnings by only 10%, whereas it raises
earnings by, seems to raise earnings by 83% if you do finish. So, this is actually part of a much more
general fact, which is that a lot of the payoff for education comes from getting your degree. It comes
from crossing the finish line. Right now, in the early decades of the signaling model, this fact was not
well-established. And so there was a lively debate: Is there a sheepskin effect? Is there not a
sheepskin effect? But until the sheepskin effect was well-established, when it was still in debate,
almost everyone took for granted that a large sheepskin effect would show that signaling was
important. Because otherwise, why would it be so important to just get over that finish line? So, in
terms of the human capital model, it's really puzzling. What is it, the last class that teaches you—
Russ: The capstone. It's the capstone class. The whole idea.
Bryan Caplan: Yeah, the capstone class. So, like, why is it the person one [?] class short of graduation
is only getting 10%, whereas if you finish that class you would get 83%?
Russ: Well, hang on. First of all – I don't know if this is a universally understood name – but a
'sheepskin' is another word for graduating college. 'Getting your sheepskin.' I don't know the origin
of that. Do you know it, Bryan?
Bryan Caplan: Yes. Yes, I do. So, it's another word for 'diploma.' And the reason is diplomas used to
be written on sheepskins, actually.
Russ: The premium. The premium over high school students is over 10% if you don't graduate. That
is, attending college makes you a little more money relative to a high school graduate. Is that true if
you go for one year, two years, three years? What you are claiming is, you might be claiming—if you
go for 3 and a half semesters and you are 1 course short of graduation, you still only get 10%? Is that
true?
Bryan Caplan: It's a little more complicated than that. So, if you go and take a very close look at the
data for college, you'll see something like for the first year of college, that might increase, if you [?]
essentially finish that, that might increase your earnings by 5-10%. Then year 2, maybe another 510%. Year 3 seems to give you nothing. And then it's year 4 that gives you the remainder. Which is
huge.
And we see that's very similar for high school as well. So, like, 9th grade seems to give you a bit, 10th
grade a bit; 11th grade seems to give you nothing at all; and then 12th grade, finishing that, getting a
diploma, that's what gives you a very big raise over what a high school dropout would earn.
Russ: Yeah. I guess the complication is that the people who do get, say, three and a half years into
their college degree or one course short, why don't they finish? And what does that tell you.
Bryan Caplan: Exactly. Now you're thinking like someone who believes in signaling. Now you're
asking, why didn't this person finish? What is wrong with that person? Maybe they just had some
bad luck. But also it suggests: “Look, in our society it's expected that you finish. There are a lot of
different ways that you could have made up whatever problems that you had; so I'm nervous about
you as an applicant”.
But let me go back to how the debate played out. So there was a long period when economists just
weren't sure if there was a sheepskin effect or how big it was. During that period everyone took for
granted that a large sheepskin effect would show that signaling was important and the lack of one
would at least undermine that. Now, in the late 1980s, early 1990s, it became totally clear that there
were huge sheepskin effects—better data came along and several papers were published and
they've never been challenged. Not even challenged successfully—no one's even tried to challenge
them. The data are now so clear. But almost as soon as the evidence came in very strongly that
sheepskin effects were very real and very large— then labor economists moved the goal posts and
said, Well, that doesn't really prove anything.
And when you know that these people making these arguments have been through the entire
educational process; they finished at least three different degrees. To be a researcher on this, you
finished your high school degree, you finished your bachelor's degree, your master's, probably your
Ph.D. And for people like that to say, I'm totally unconvinced that it matters whether you actually get
your degree and cross the finish line, to me it's just insane. Like, you know very well, you were a
student, you know that if you didn't finish that would ruin your life and prevent you from getting this
job. You know that. Everyone around you knew that. If you were to go and deny that to your fellow
students and say, I'm not showing up for the final exam because what difference does it make? It
makes a lot of difference. And it makes a lot of difference because people who don't finish are quite
different from people who do, and employers will hold it against you.
Here is one fact that I've often noticed. What do students do when a professor cancels class? They
are happy. They cheer. And from a human capital point of view this is bizarre. Basically, the
professor is saying: “You want me to train you to be a better worker so you can do better in real life?
Well, I'm going to keep your money and I'm not going to give you the training. See ya!”. That is
effectively what the human capital model is saying is happening when a professor cancels class.
On the other hand, so the signaling model says, well why won't the students be happy? The
employers will never know that the professor canceled class. What they are learning they are
probably going to never need to know again. It's not going to show up on their transcripts. If
everybody learns less then this is not going to change the distribution of grades in all likelihood. So
then students get an extra afternoon off and it's not going to affect their future.
Or here's another one of my favorite debating points. Claim: Right now you can get the best
education in the world for free if you want it. Well, suppose you think Princeton is the best
education in the world. You don't need to apply; you don't need to get admitted. All you do is move
to Princeton and start attending classes. And in my experience, no one will stop you; no one will card
you. If you go to the professor and say, I'm not a student here but I'm interested in your class, most
professors will get a tear in their eye: Someone actually wants to learn from me.
But if you go and get this totally free Princeton education for four years, there is one thing you won't
have at the end: any proof you ever did it. Right. And if you consider—Deal A is you go to Princeton
and you get a Princeton education with no record you ever did it, or you go to a much lower-ranked
school where you admit you are getting a worse education but there is a record, which one is going
to do more for your career? Almost everyone says, well, obviously the second one. The first one may
make you an interesting person, may be a great experience, but employers aren't going to care. They
won't believe you if there is no sign you were ever there. Whereas getting a bachelor's degree by the
book from Podunk State on the other hand, that doesn't give you nearly as much as getting a
bachelor's degree from Princeton but it gives you something that is real and tangible.
. So, I've often had this argument with Tyler Cowen about signaling. He says, Look, Bryan, you don't
know what you're talking about. I actually have a job where I have to hire people and fire people and
I know how things work. And he says, And I say within three months we know whether a worker is
good or not, so it's crazy to think you have to go and spend all these years signaling in order to get
the job.
But I say: Wait a second, you are looking at this the wrong way. What has to happen before you can
evaluate someone for three months? You have to hire them. What has to happen before you hire
them? You have to interview them. What has to happen before you interview them? Well, you have
to go and pull their application out of a giant stack of other applications. And any time someone has
300 applications for one job, what are they going to do? They are going to go and start thinning it by
throwing away applications from people that don't seem like they are worth giving an interview to.
So, if you have an unconventional transcript, an unconventional background, so maybe you don't
have any proof that you did it or maybe it's just something weird that you did or unusual that you
did, this is something where employers quite reasonably don't give you a chance because they are
not in the business of giving chances. They are trying to run a business.
Russ: Here's an interesting example. Sometimes someone turns out to have lied about their
qualifications for a job. They don't have a degree from Harvard. They didn't get a Master's in suchand-such. And they are immediately fired. And they are not fired because they can't do the job well.
They are fired because they lied. Not because they are incompetent. Which would seem to suggest
that the piece of paper itself is maybe not so important.
Bryan Caplan: Well—there is a reason to be concerned about having con artists in your
employment, right? I'm saying as a business decision, saying look, this guy is perfectly able to do the
job, but he's a con artist. I would fire that person—
Russ: I didn't say it well. What I'm saying is that actually attending university didn't have any impact
on whether they were good at the job or not. It's not like the people say, oh, the person didn't
attend this university, doesn't have the degree—obviously they can't do the job. They've been doing
the job. So it's really just the piece of paper as a signal that matters. When they are fired it's not
because they don't have the skills. They are fired because they were dishonest. Which is fine. I
understand that. But it seems to be consistent with your theory.
Russ: Your point is that the people who go and don't go aren't the same. Let's come back to that
and talk about how that affects how people measure the return to education and why it's so
important.
Bryan Caplan: When you see that college graduates are earning 83% more than high school
graduates, you have to ask, well there's one thing that's different about them and that the college
graduate has—went to college and finished. But is that the only thing that's different about college
graduates versus high school graduates? Of course not. So the average college graduate is probably
going to be smarter; he's probably going to be harder-working. He's probably going to be more
conformist, less impulsive, have many other advantages. And that 83% is capturing all the
advantages that the college graduate has. Not just the single advantage of the education. It's
capturing the benefits of a lot of advantages he had before he ever started school.
So if you really want to find out how much did the education raise his earnings, you need to correct
for or adjust for all these initial advantages. So there is a big research literature that tries to do this
in economics. If you do this the simple way, namely you try to go and measure the pre-existing
advantages and then re-do the statistics, then you generally find that the true education premium is
a lot less than the observed one. So, basically just putting in, just correcting for your measured IQ
before you start college, that will usually bring the payoff down by about 30%. So, bring it down
from like 80 to like 55, something like that.
And then once you put in that adjustment you say, well, there's a lot more going on than just
intelligence. There's work ethic, conformity. Some of these things there aren't very good measures
for, but you can still say it seems plausible that this actually—there are other abilities that are
accounting for this.
If we go and correct for every ability we can measure, we see that the payoff for education seems to
go down by 35%. Well, what about all the stuff we haven't put in? Maybe that changes it to like 45%,
something like that. So after going over all of the evidence that I could find and just weighing it all,
my best guess is that only about 55% of the gain that you seem to get is genuine. And the rest is
what college graduates would have actually earned if they hadn't even gone to college.
If you look at earnings in countries where they have really crummy school systems, it seems like a
year of education pays as much or more as it does right here.
Russ: Is that true? I'm a skeptic about that, Bryan. Tell me about that.
Bryan Caplan: Right. So there's been a lot of effort to measure the international return to education,
look at different countries. And the very standard result is that in poor countries the payoff in the
labor market of getting another year of education or getting more degrees seems to still be on the
order of like 10% per year. In terms of what they are teaching them, it's crazy. But in terms of saying,
look, people who are willing to jump through these hoops and endure this horrible process where
they don't even learn anything, it still seems to say something about you as a worker and it makes
employers in those countries more willing to hire you, and you do actually get an advantage. Even
though you don't seem to be learning much of anything.
You can take a look at developing countries and see that people with more education make more
money there, just like they do here. The premiums are very similar to here or actually a bit higher.
So—again, the main thing to remember is of course employers don't know the details. So you might
have gone to the school where the teacher never showed up, and maybe they wouldn't have
considered that to be much of a signal, but if teachers show up two thirds of the time and yours
didn't show up at all, they may still be willing to give you a big pay hike because they are just playing
the odds. Which is what all employers are doing all the time, is just playing the odds.
To me, what is most impressive is that when I actually talk to people who officially don't believe in
signaling, their actual experiences are so similar to mine. So, similar to what the signaling model
would predict. I was talking with one very, very eminent labor economist about his experience as a
bank apprentice in Germany, and I say, so did you consider just going on and being a banker? And he
said, no, no, you have to get college for that. And he actually laughed at his own sentence, because
he realized that what he was saying fit with my story so much better than his; and yet that was his
spontaneous reaction to what he saw with his own eyes.
Russ: Well let's close with an issue that comes up now and then. Which is the case for subsidizing
education. A lot of people argue that because the returns are so high, even if they are only 40 or
50%, the returns are high. And since students have difficulty accessing capital, frequently to borrow
to get that, to make that investment, capital markets for human beings are not very effective. I can't
promise you my future returns so it's hard for me to use that as collateral. So people use that along
with the alleged externalities, positive externalities of having an educated public, to justify public
subsidies to education, either in the financing of education or the provision of it. What's your
opinion on that?
Bryan Caplan: Well, really what's so important about the signaling model is that it says, look, you are
correct to believe that education increases the earnings of the individual who gets the education.
You are wrong, though, to think that it's socially valuable for everyone to get a lot more education.
Because all that will do is raise the bar for how much you need to have in order to get a job at the
same level. The heart of the signaling model is saying there actually is a big negative externality of
education. That every time you get more, you are making everyone else who didn't get the, didn't
jump through the same number of hoops look worse. So really what the signaling model is saying—
Russ: It's an arms race.
Bryan Caplan: Yes, it's an arms race. And the fact that the private return is high is really a very bad
argument for pouring more money on.
What you are looking at is return for the marginal people who are just on the edge of going or not
going. The return for those people is quite mediocre. And if you adjust for ability and everything
else, I would say that we have subsidized education way past the point of positive returns. So by my
calculations, actually, the social return to education is now quite negative.
It would be a much better policy to drastically scale it back, so rather than encouraging more people
to go, I think it's better to discourage them from going or at least to encourage them less.