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The Returns to College Education

Author

Listed:
  • Philip R. P. Coelho

    () (Department of Economics, Ball State University)

  • Tung Liu

    () (Department of Economics, Ball State University)

Abstract

We apply grouped college-level data to estimate the returns to a college education. After comparing different econometric methods for estimating cluster samples with grouped data, we argue that there are two sets of population parameters of concern: one for estimating withingroup effects, and the other for between-group effects. This leads to three major points: 1) the traditional use of fixed-effects models usually ignores the importance of between-group effects and may lead to erroneous conclusions; 2) regressions with group variables have several identifiable econometric issues; and 3) estimations of between-group estimators for betweengroup effects with grouped data are valid. We investigate the returns to higher education using explanatory variables representing characteristics for individuals, colleges and universities, and states with grouped data from over 500 colleges and universities. We generate a major index measuring college characteristics that are related to students’ disciplines in their degree majors. We find that college majors are important determinants of post-graduation incomes; in contrast the incremental value of private schooling over publically funded colleges is relatively modest. At zero rates of interest it takes approximately 59 years for the excess earnings in starting salaries attributable to a private education to equal the extra costs of four years of private schooling.

Suggested Citation

  • Philip R. P. Coelho & Tung Liu, 2012. "The Returns to College Education," Working Papers 201202, Ball State University, Department of Economics, revised Aug 2012.
  • Handle: RePEc:bsu:wpaper:201202
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    File URL: https://ballstate.box.com/s/nbiul4f3gbrc5wxm3vjqqbhjxtpwped6
    File Function: First version, 2012
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    References listed on IDEAS

    as
    1. Dan Black & Jeffrey Smith & Kermit Daniel, 2005. "College Quality and Wages in the United States," German Economic Review, Verein für Socialpolitik, vol. 6(3), pages 415-443, August.
    2. Dan A. Black & Seth Sanders & Lowell Taylor, 2003. "The Economic Reward for Studying Economics," Economic Inquiry, Western Economic Association International, vol. 41(3), pages 365-377, July.
    3. Caroline M. Hoxby, 2009. "The Changing Selectivity of American Colleges," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 95-118, Fall.
    4. Maddala, G S, 1971. "The Use of Variance Components Models in Pooling Cross Section and Time Series Data," Econometrica, Econometric Society, vol. 39(2), pages 341-358, March.
    5. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
    6. Behrman, Jere R & Rosenzweig, Mark R & Taubman, Paul, 1996. "College Choice and Wages: Estimates Using Data on Female Twins," The Review of Economics and Statistics, MIT Press, vol. 78(4), pages 672-685, November.
    7. Stacy Berg Dale & Alan B. Krueger, 2002. "Estimating the Payoff to Attending a More Selective College: An Application of Selection on Observables and Unobservables," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1491-1527.
    8. Stephen G. Donald & Kevin Lang, 2007. "Inference with Difference-in-Differences and Other Panel Data," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 221-233, May.
    9. Moulton, Brent R, 1987. "Diagnostics for Group Effects in Regression Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(2), pages 275-282, April.
    10. Dan A. Black & Jeffrey A. Smith, 2006. "Estimating the Returns to College Quality with Multiple Proxies for Quality," Journal of Labor Economics, University of Chicago Press, vol. 24(3), pages 701-728, July.
    11. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
    12. Kloek, T, 1981. "OLS Estimation in a Model Where a Microvariable Is Explained by Aggregates and Contemporaneous Disturbances Are Equicorrelated," Econometrica, Econometric Society, vol. 49(1), pages 205-207, January.
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    1. repec:pal:easeco:v:43:y:2017:i:4:d:10.1057_eej.2015.44 is not listed on IDEAS

    More about this item

    Keywords

    college education; between-group effects; cluster samples;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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