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17 May 2018

Consider the following facts. After the age of 25, persons with college degrees earn more than persons with no education beyond their high school degrees, ceteris paribus. Moreover, persons with high school degrees earn the same as persons who have had some college training

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Beverley Smith
Beverley SmithLv2
20 May 2018

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Related questions

George Washington University got rid of its SAT requirement, and applications soared 28 percent. This kind of jump is unprecedented, the school said. About 6,000 more students applied compared to the year before. It also saw a "significant" increase in applications from blacks, Hispanics, international students, and those who would be the first in their family to go to college. That's what GW was hoping for when it started allowing applicants to opt-out of submitting their standardized test scores this year. The school says it won't hurt your chances of getting in. About 20 percent of those who applied chose not to submit their scores. GW is one of the largest and most prestigious schools to go "test-optional," but it's a growing trend. More than 30 schools dropped the requirement in the past year, bringing the total to about 850. The list includes mostly liberal arts schools, including Wesleyan University, Bryn Mawr, and Wake Forest. The thinking is that dropping the test requirement will encourage more low-income and minority students -- who tend to score lower on the SAT -- to apply. While academic research is mixed on whether a "test-optional" policy really does increase diversity among enrolled students, some schools have seen it work. Diversity is up, and they're attracting strong applicants who may not have applied before. Experts say that high school grades can be much better at predicting whether or not a student will succeed in college than their SAT or ACT scores. Some other factors may have played a role in GW's spike in applicants, too. The college also credits its new, data-driven recruitment strategy and revamped campus visit experience. The increase in applications could make it more difficult to get in. GW admitted about 60 more applicants who applied early-decision compared to last year, but a spokeswoman said the college has not yet determined how many total students will be accepted. And it appears that the applicant pool could be more competitive this year. Of those already admitted, high school GPAs are slightly higher than in last year's class.

Is this an increase in demand or an increase in quantity demanded? There is no wrong answer, just back up your answer with sound economic reasoning.

The opportunity cost of going to college is almost never discussed, yet it is quite high, so high that it is seriously impacting the broader American economy. For non-economists, “opportunity cost” is one of the most important concepts in economics. Because of scarcity we only have limited resources, and when we use those resources to do something like go to college, we cannot use them for other things that we also believe are desirable.

By far the most important resource we use in producing goods and services is labor or “human capital.” Based on what we pay owners of resources, we can say that roughly two-thirds of all production of goods and services is attributable to direct human effort – work. When kids go to college, they forego entering the labor force in a major, full-time manner. When six or seven percent of the entire American population is in college, that means a significant reduction in work effort occurs because otherwise highly productive persons in the physical prime of their lives are only lightly utilized in making things or providing services.

Today, only slightly over 59 of every 100 Americans of working age actually work, down from almost 66 in 2000. If we had the employment-population ratio of 15 years ago, we would have at least 16 million more working Americans today – an increase of over 10 percent. Our output would be probably the better part of a trillion dollars higher. The push for “college for all” is one reason we have less work effort today (to be sure, the modern welfare state has also lowered work incentives a lot for other reasons).

The college for all crowd says higher education augments one’s human capital, and we forego output today from working to bolster output tomorrow from more productive workers. And, no doubt, that is sometimes true. We have many productive engineers and accountants who gained important skills in college, for example. But is that necessarily true of all college graduates, particularly when Arum and Roksa tell us that graduating college seniors typically have only marginally better critical reasoning skills that freshman? And when over 40 percent of those entering four year colleges fail to graduate in six years? What if millions of those who do graduate take jobs similar to those without that college education? What if the debt incurred to pay for the college leads many to delay marrying, delay buying houses? There is evidence that to some extent the push for college has led to all of these unintended consequences.

The Federal Reserve Bank of New York has published great work showing that there is a very severe underemployment problem amongst college graduates, and other equally good research demonstrating what many of us have been saying for years: the student financial aid programs such as subsidized student loans, have pushed up the cost of college. Now a sister Federal Reserve Bank, namely Philadelphia, is jumping into the act.

The Philly Fed in a new study shows that high student loan debt is preventing young potential entrepreneurs from starting new businesses – they cannot afford the necessary debt. Opportunity cost again: if I borrow a lot to go to college, I cannot afford to borrow to start a business.

Enrollment in all forms of higher education today are up roughly 50 percent or seven million from what they were in 1990. What if enrollments had only risen proportionate to population growth – we would have three or four million fewer enrolled in college today. Would our nation be better or worse off? No one knows for sure, but the continued rise in the proportion of Americans with a college education has been accompanied by a sharp reduction in the rate of economic growth. I bet we would have fewer underemployed recent graduates. I bet we would have less than 17 percent delinquency rates on college loans, and far less than a trillion dollars in loan debt. I bet we would have a higher rate of labor force involvement and entrepreneurial activity among the young. And I bet we would be spending tens of billions less on higher education, and at least a little bit more on capital goods investment, highway construction, et cetera. In short, I suspect we would have been better off as a nation.

Richard Vedder directs the Center for College Affordability and Productivity, teaches at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.

Question :

This is a short article discussing the concept of opportunity cost and college. Provide your views on this topic.Do you agree/disagree with the article? Why? What are your thoughts on the current employment landscape of college graduates? Provide any insight on this topic on a specific industry, your own experience, or the experiences of people that you know who have already graduated.

Individals are of two di §erent abilities: high (H) and low (L). An individual knows his or her own

ability but an employer does not. Employers believe that both types of individuals are equally likely

in the population, and therefore has an initial (prior) belief that an individual is high ability with

probability 1. Before an individual looks for a job, he or she has an opportunity to go to college. 2

Assume that attending college does not change an individualiÌs ability; this problem shows that even in

this circumstance, college can perform a useful social function. The e §ort cost of attending college is

di §erent for individuals of di §erent abilities. In order to attend college, high ability individuals must

expend e §ort 1, and low ability individuals must expend e §ort 1, where a < 3 (this means that a 3a

low ability individual has a higher cost of attending college). Not attending college costs 0. After

observing an individualiÌs education (that is, whether he or she attended college) an employer makes

the individual a job o §er. The wage that the individual receives is equal to the employeriÌs belief that

the individual is high ability, given the level of schooling that the individual has chosen to acquire. For

example, if the employer believes that a college graduate is high ability with probability 2 he will o §er 3

a college graduate a wage of 2 . If he believes that an individal with no college education is high ability 3

with probability 1 , he will o §er an individual without college a wage of 1 : An individualiÌs payo § is 44

equal to his wage, minus the cost of education..

First consider a separating equilibrium. In a separating equilibrium, high ability individuals attend college, but low ability individuals do not.

  1. (a) If the employer observes that an individual did not attend college, what is his belief about the individualiÌs ability? What wage will he o §er individuals who do not attend college?

  2. (b) If the employer observes that an individual did attend college, what is his belief about the indi- vidualiÌs ability? What wage will he o §er individuals who attend college?

  3. (c) Given the wages paid to college graduates and those who do not attend, will the high-ability individual chooose to attend college? (Hint: compare the payo § of attending college for the high ability graduate to the payo § of not attending college)

  4. (d) Given the wages paid to college graduates and those who do not attend, for which values of a will the low-ability individual chooose to attend college? (Hint: compare the payo § of attending college for the low ability graduate to the payo § of not attending college)

  5. (e) In a separating equilibrium, a low ability individual does not attend college. For which values of a is this expectation consistent with the low ability individualiÌs strategy?

    Now, consider a pooling equilibrium in which all individuals attend college; that is, both high and low ability individuals attend college. If some individual were to choose not to attend college, the employer would believe that he or she must be low ability, and would o §er a wage of 0.

  6. (f) If the employer observes that an individual attended college, what is his belief about the individ- ualiÌs ability? What wage will he o §er to college graduates? (Hint: The employer expects that all individuals attend college. This means that attending college conveys no information about the individualiÌs true ability).

  7. (g) Given the wages paid to college graduates (and the wage that would be paid to non-grads) would the high-ability individual choose to attend college? For which values of a would the low ability individual choose to attend college?

  8. (h) In a pooling equilibrium, both high and low ability individuals attend college. For which values of a is this expectation consistent with the individualsiÌstrategies?

    Finally, consider a sem-separating equilibrium in which high-ability individuals attend college (for sure), but low ability students attend college with probability 0 < s < 1:

  9. (i) If the employer sees that an individual attends college what is his belief that the individual is high-ability? What is the wage to college graduates? (Hint: Remember, all high ability individuals attend, but low ability individuals attend with probability s. Divide the probability of an individual being high ability and attending college by the overall probability of an individual attending college).

  1. (j) If the employer sees that an individual did not attend college, what are his beliefs about the individualiÌs ability? (Hint: all high ability individuals attend college)

  2. (k) The low-ability individual is willing to randomize between attending college and not attending college. Use this to Önd the probability that the low-ability individual attends in equilibrium.

    Bonus: Comment on the purpose of college illustrated in this example. How is this purpose a §ected as college becomes easier for the low-ability type (i.e. as a increases)?

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