Jonathan Barazzutti

Many in my generation follow the default path after graduating high school by getting a diploma. The assumption is that a university education teaches valuable skills that will help them get jobs in the future. But does a university education improve a person’s workplace productivity?

Research from The Economist finds that on average, going to an American university and getting a degree has positive returns in the long run. Those who earn a degree in the arts or humanities can expect around a 5% annual return to their degree over the next 20 years of their life, and those who get a degree in a STEM field can expect around a 12% annual return to their degree over the same period.

There is variation depending on the university one goes to. Some universities have negative long-run returns for degrees in the arts and humanities, and in general, the more selective a college is, the higher the expected return on the degree. However, the significant overall effects are between those who do and don’t get a college degree and between those who get a degree in the arts/humanities and those in STEM. While rising costs of education in the United States have reduced the returns of education, the fact is that college is still a good investment if one wants to maximize their income.

And so it might be taken from this data that because those who get a degree tend to earn more, college degrees teach students valuable skills they can apply to in the workplace, thereby increasing productivity. But is there evidence for this direct link?

Research in 2018 by Tayyeb Shabbir examined the extent to which so-called “sheepskin effects” on education exist in Pakistan. Sheepskin effects refer to instances where those who get a given credential earn more than those who do not, holding the amount of studying constant. If it were the case that employers were rationally assessing the amount of skills that future workers had when deciding who to hire and how much to pay their employees, one would expect sheepskin effects to be minor or null. But Shabbir found that these effects were significant even after controlling for measures of innate and cognitive ability, suggesting that employers overemphasize degrees in themselves instead of the value conferred from the degrees. Craig Riddell in 2001 examined the empirical literature on sheepskin effects in the United States and Canada and found strong evidence for their existence, suggesting that employers overvalue those who have degrees relative to those who do not in North America. 

However, he also pointed out that years of schooling are important determinants of success in the labor market. So, perhaps employers overvalue credentials in themselves, but that doesn’t mean that schooling doesn’t confer economic value, which employers are looking for when hiring an individual. Does the amount of education in itself affect worker productivity?

Particularly compelling evidence comes from a 2011 Russian natural experiment in which an educational reform shortened the university study period by one year and reduced the content of the curricula without changing the quality of the admitted students. If schooling in itself had a positive effect on worker productivity, we would predict that those who graduated following the reform would have lower wages and lower employment prospects relative to those who graduated before the reform. However, there was no adverse effect whatsoever.

What are we to make of this?

The reason why there is a positive payoff to a university degree has little to do with the skills one learns in the process of getting the degree. Instead, it primarily has to do with two things:

1. An overvaluing of degrees by employers, and
2. Employers using a person’s educational attainment as a proxy (i.e. signal) for other traits about the individual, such as intelligence, industriousness, conformity, etc.

So while degrees have a positive payoff for those who get them, that doesn’t mean that the economy is better off just because more people have degrees. Postsecondary education’s value is primarily to differentiate individuals according to traits employers may find valuable. If someone is willing to spend the time and effort required to get a degree, it implies that the individual is more intelligent, industrious, and conformist than someone unwilling.

However, when everyone gets a university degree, the degree no longer signals anything relative to others. It simply leads to everyone needing to spend four more years of their lives in education to get the same job they would’ve been able to get without a degree 50 years ago. This has created the phenomenon known as “degree inflation,” whereby jobs that once didn’t require a college degree now do, without any corresponding increase in the complexity of the on-the-job tasks. 

A university system as a means of educating the future workforce may have been valuable a century ago when it allowed employers to distinguish the traits of some workers compared to others. Those who were able and willing to get a degree back then would have been significantly more intelligent and industrious. But now that everyone is getting a degree so that today the mean IQ of a university student is a mere 102, it no longer works as a signal. Those who want to distinguish themselves need to spend more years than before getting more certifications, such as master’s degrees and PhDs.

This doesn’t mean that a university degree is never valuable. Some professions, such as being a doctor, should probably require some level of prior education before someone is allowed to be in the profession. However, most degrees today (probably between 70-90%) do not confer any meaningful skills for future worker productivity. Some enjoy learning and the pursuit of knowledge (such as myself) and may thus enjoy getting a degree. But in my experience, most students see a degree as instrumental to a future job, as opposed to something valuable in itself.

Are university degrees economically valuable? Yes, but really, no. The postsecondary education system must be reconsidered so that individuals spend fewer years of their youth in inefficient institutions that fail to give students the skills they need for tomorrow.