Faulty ammunition

Using income to measure the reward to education is misleading


We propose that per-capita income gaps across US states and Canadian provinces can be explained by university education. Our ordinary least-squares regressions show university education having a robust positive and significant effect on per-capita incomes, when controlling for, e.g. taxes, unionization, government spending, and the sectoral composition of the economy….Our results support a causal link from education to incomes[.]

Just a paper I stumbled across this evening. Obviously, this could be used by certain people with agendas to promote education funding, whatever. That is, of course, if think tanks ever pick up an academic journal, which is a rare event from my admittedly limited experience, but I digress…

What defeats the whole point of the paper is that this result is a truism. Suppose we have a productive span of 45 years in the workforce. If we take five (or ten) of those years and spend them in poverty, studying, of course there must be a greater annual reward at the end of the tunnel, otherwise very few people would bother with university.

However, the total wealth accumulated over the 45 years will show much less of a differential than the income in any one year, because the people who opt out of PSE will have more years of earnings. If we factor in that people are risk-averse and typically prefer a smoothed pattern of consumption, the difference would be even smaller.

The problem is that the study I just described is beyond our tools. It’s very easy to measure someone’s income. It’s very difficult to measure someone’s happiness over different streams of income varying over 45 years.

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