## Sunday, February 24, 2013

### ¿Vale la pena estudiar? (2) Datos básicos

Is going to university worth it? (2) Basic facts
by Samuel Bentolila

Apparently, many youths in this country think that “studying is a scam”, according to an article in El Confidencial. True or not, if young people believe it, we would be facing a serious problem. So, today I address once again last week’s question answered by Florentino Felgueroso, Luis Garicano and Sergi Jimenéz, bringing some basic additional facts about the economic viability of studying in Spain.

A simple form of calculating the (financial) return of studying is to see how salary changes when the level of education is increased , defined as follows:

Expected income = [Probability of employment * Salary] +
[Probability of unemployment * Compensation in unemployment]

(Compensation in unemployment would be unemployment benefits, if they’re available.)

As changing the level of study affects not only income but also future income, the decision to continue studying or not will depend on this variable: the difference between (a) the present value of the sum of expected discounted future income flows for someone with a higher level of education (level 1) and (b) this value for someone with a lower level of education (level 0).

The idea is to add present and future income, discounting them – that is, weighting them less – for what happens in the future instead of today for distinct educational levels, and find the difference between these sums. It is also necessary to subtract the cost of attaining a level 1 education. If the difference is positive the person will decide to continue studying and otherwise not.

Given the importance of future income flows, I’m going to focus on workers older than 20 (for those between 16 and 19 years the revelations that follow are even more significant).

We will approximate the probability of being unemployed by the unemployment rate. This varies greatly with the level of education. Chart 1 shows the average unemployment rates by education level for the population of 20-24 years and of 30-44 years in the period 2005-2010 in Spain.

Chart 1 – Rate of unemployment by level of education and age, 2005-2010 (%)

We see that the rate of unemployment is much greater for the youngest (on average, 22% versus 11%). Later, workers from 20 to 24 years old that finish mandatory secondary education (ESO, 1st stage) have an unemployment rate 5.6 percentage points less than those that only achieved primary school education and for those from 30 to 44 years old, 5.1 points less. The failure to complete secondary school in the ESO is apparently very costly.

In the third place, compared with having finished ESO, having upper-level secondary education (Bachelor’s and FP, 2nd stage) reduces the rate of unemployment by almost 4 percentage points and having higher education (pre-doctoral) by 5 points. In the 30 to 44 year age group the respective advantages are of 3.4 and 7.2 points. The economic incentive to study past ESO is not, in principle, insignificant.

Additionally, the increase in the employment rate for having studied more is also significant, although less so than in other countries. Graph A7.1, taken from Education Review. OECD Indicators 2010, shows that the income derived from secondary education of the 2nd stage is 19% greater than that of a lesser educational level, compared to 22% on average in OECD countries. Still, for workers from 25 to 34 years old, the difference is only 7% in Spain, compared to 18% in OECD countries.

Chart A7.1 (from Table A7.1)
Relative incomes from labor (2008 or indicated reference year)
By level of training of the population from 25 to 64 years (second stage of Secondary Education = 100)

The difference is greatest for tertiary education or better. With respect to post-mandatory secondary education, performance is 38% compared to 53% in OECD countries. Only in Sweden and Norway is the difference less (probably because of the wage compression resulting from collective bargaining, which is very centralized). Some of this lower level of income can be ascribed to the fact that, as Florention, Luis and Sergei noted in their post, many workers can only get jobs they are overqualified for. (Here are the facts.)

We could now calculate changes in expected incomes derived from an increase in the level of education. But, although it is interesting, this measure is limited. For one thing, these data do not take into account other characteristics like gender, experience, cohort, etc. and are merely measures that don’t capture causal effects: as Antonio Cabrales has been explaining, for example here, evaluating the causal effects of education is not trivial.

In addition, the well-being of an individual does not only depend on salary, but also other working conditions, like the length and composition of a work day. Only the probability of employment is not of little importance either, but also the stability of employment. As we have noted often on this blog (for example, here and here), the temporary employment rate is very high, especially among youths (data from 2005-2010): 58% of those from 20 to 24 years old compared to 42% of the workers from 30 to 39% and 22% of those from 40 to 49 years old.

More concretely, the distribution of educational level by type of work, for example in 2009:3, is as follows (thanks to J. Ignacio García-Pérez who gave me the figures):

We see that temporary workers have a level of education much lower than the permanent workers. This could be due to the fact that having a level of study much higher reduces the probability that the worker is offered a temporary contract or other reasons.

In total, the facts suggest that reaching a higher educational level helps to obtain better salaries, realizes a lower unemployment rate, and provides more stable employment. Without doubt, these favorable effects don’t seem to induce sufficient demand for education (except in crises). In the next entries, various collaborators will present results from analysis of the decision to pursue further study and some implications for public policy.