A costly way to identify intelligence

Most people don’t need a college education to do their job, but they need a degree to get hired, writes Daniel Indiviglio in The Atlantic. It’s a very expensive way to identify who’s smart enough to do a job, he writes.

. . . when high school standards declined and college became more popular, some applicants stood out above others as being more educated and potentially smarter than those with only a high school diploma. If the trend keeps up, however, a time will come when a college degree isn’t enough either: masters degrees will be commonly sought, as the value of college degrees fall to be worth as little high school degrees are today, since so many applicants will have them. If this trend keeps up forever, perhaps we’ll one day have locksmiths with PhD’s.

Waitresses with a college degree earn more money, but it’s probably not the degree, argues Andrew Gillen.

College is the best investment on the market (for those who complete a degree), counters  Derek Thompson, also in The Atlantic.  Over a working lifetime, “the typical college graduate earns $570,000 more than the average person with only a high school diploma.”

Let’s say you’re deciding where to invest $100,000 at age 18. Maybe you think to put it in gold, corporate bonds, U.S. government debt, or hot company stocks.

The $102,000 investment in a four-year college yields a rate of return of 15.2 percent per year, more than double the average return over the last 60 years experienced in the stock market” and more than five times the return in corporate bonds, gold, long-term government bonds, or housing, according to a report by Michael Greenstone and Adam Looney.

Note that the associate degree’s rate of return is 20 percent, higher than the pay-off for the  bachelor’s degree. I’d guess that’s because the costs of attaining the degree are lower and many associate degrees go to nurses, who make good money.

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Comments

  1. “The $102,000 investment in a four-year college yields a rate of return of 15.2 percent per year…”

    Very impressive, for the 53% of students who COMPLETE the four-year degree (usually in 5 or 6 years). But what about the other 47% who drop out with no degree and a mountain of non-dischargeable debt? I suspect the big winners here are the colleges and the lending institutions.

    Pull my other leg, it’s got bells on it. This is selection bias with a vengeance!

  2. Cranberry says:

    It’s not costly for employers.

    I don’t think the employers are necessarily looking for college-level skills, whatever those might be. They do want to employ people who can interact with bosses, coworkers and customers in a rational manner. They prize employees who show up on time, and who represent their businesses well. Being able to complete a simple task independently, to use arithmetic, and to write a basic business letter or email are also necessary skills.

    All those skills should have been taught in high school. If colleges must institute remedial classes for incoming freshmen, I suspect many high schools aren’t doing their job. (There are many reasons for that, of course.)

    At any rate, employers aren’t trying to find diamonds in the rough. They have a business to run.

  3. Unless you are dealing with an engineering degree or some other type of preparation-for-work degree, college does not have a payout per se. My guess is that this statistic ($millions more) is a reflection of the difference between a doctor, lawyer, engineer, MBA who was required to have a degree before getting that job and the people who can’t get that degree.

    Beyond the “required” degrees, what college does do is indicate those who are motivated and dedicated enough to persevere through four years of it. Which person is more likely to stay in a company and climb the ladder to the better paycheck, the slacker drop-out or the motivated one? Which person is more likely to skip around and continually be on the lowest rung?

  4. Richard Aubrey says:

    Not using a calculator here. Rule of 72 tells me that the investment will double every fifteen years, roughly, at 5%. So, $100k at 18. $200k at 33. $400k at 48. $800k at 63. So, about $850k at normal retirement, should there still be such a thing. At 5%.
    We should add to that any principal accumulated by working those first four or five years. That wouldn’t be much, but if you got a car at eighteen, even a beater, you’d have at least some trade-in for the next one,where a recent BA grad would have none. A couple of pieces of furniture….
    Did I mess up the math?
    Something not right here.

  5. There was a very telling quote in the Harvard Business School alumni magazine one time from a corporate recruiter who said that if she had her way, she’d recruit directly from their admitted students’ list and train them herself rather than having HBS do it. The MBA program was basically functioning as a pre-screening tool.

    Rigorous certification exams can serve the same purpose. The Chartered Financial Analyst (CFA) program requires passing 3 all-day very challenging exams, each with only 35-45% of takers passing.

    Many of the position requirements in my DH’s field read MBA *OR* CFA. He has advised younger colleagues already working in the industry to skip the MBA and just get the CFA. He only advises the MBA to people looking to make a career change.

  6. Mark Roulo says:

    CW,

    You are thinking of David Gavin of HBS quoting some (but not all) recruiters in general. One version is, “A top recruiter at Harvard Business School said, ‘If given a choice between the admit list and the graduation list, the admit list is what you want.’ ”

    Another (from an interview) is, “A number of recruiters said that what they value most is the screening process top schools use to pick students, and a few preferred to recruit straight from a school’s admission list. ”

    It is pretty clear (as you claim) that for a lot of recruiters, the primary point to MBA school is to find people to hire, not to actually educate these people. Which is sad.

    I wonder how much this is also the case for non-STEM 4-year degrees. I fear that a lot of the 4-year degrees are serving as a proxy for intelligence, mostly in the sense that if you are good enough to get in to school XXXX, then you probably are smart enough for whatever a given company wants.

    $100K – $200K and four years for a glorified IQ test seems like a very bad idea, but I have no idea how to change this. Lord knows, the schools aren’t going to do anything …

  7. Investing based purely on historical returns is like driving with eyes fixed firmly on the rear-view mirror.

    Abnormally-high rates of return tend to get competed away. Buying overvalued assets wll lose you money, regardless of how stellar the price trajectory that led to the overvaluation.

  8. And all of this is because the USSC f**ked up with the decision in Griggs.

  9. CarolineSF says:

    Are we not confusing correlation with causation yet again? I repeat my suggestion that all journalists (and bloggers) be required to recite “Correlation does not equal causation!” for 5 minutes every morning.

  10. Engineer, I wouldn’t say that the USSC screwed up in Griggs. Here is what the court found:

    The Supreme Court ruled that under Title VII of the Civil Rights Act, if such tests disparately impact ethnic minority groups, businesses must demonstrate that such tests are “reasonably related” to the job for which the test is required.

    Which makes sense…if I’m hiring a IT geek, I want to test the prospective candidate on IT related things (that’s allowed), but I cannot test the candidate on things which have nothing to do with the job in question.

    When Duke power added the IQ test in addition to the high school diploma requirement, the court ruled that Duke power went too far.

  11. Michael E. Lopez says:

    … because general intellectual ability or, say, proof that one remembers one’s 7th grade history couldn’t possibly have anything to do with job performance, could it?

    Disparate impact analysis is one of the most condescending, overtly racist things I’ve ever seen in my life, second perhaps only to affirmative action.

    But wait… doesn’t requiring college degrees have a disparate impact on minority applicants?

    Just count the days; sooner or later one of my legal brethren will make that argument.

  12. Deirdre Mundy says:

    Power companies take people on and then train them as linemen. How do you test someone’s ability to learn without something like an IQ test? Especially since “High School Diploma” can mean different things from different schools?

  13. Michael Lopez–”But wait… doesn’t requiring college degrees have a disparate impact on minority applicants?”

    I’m pretty sure that the original Griggs v Duke decision DID find that requiring high-school diplomas for this specific class of jobs indeed created a disparate impact. What happened to that thread of the decision in subsequent cases I don’t know…it seems to have disappeared or at least been highly diluted.

  14. Cranberry says:

    This entire conversation is amusing. Yes, there is a point at which the expense of a college degree will outweigh the benefits. On the other hand, the demand for a college degree has not decreased. The customers believe they are making a good investment, whether or not those standing on the sidelines agree with them. It might be possible to create a network of new, cheaper degrees and certification programs, only to find that no college-bound parent is willing to switch systems.

    It has something to do with the increased social status a college degree confers. When there were personal ads in magazines, did anyone notice the “professional class” qualifiers in some ads? I don’t know how you can put a price tag on access to (perceived to be) higher social circles.

  15. Oh, the effects of the Griggs decision have been diluted quite a bit from the original ruling.

    In Wards Cove Packing Co. v. Atonio the Court reduced the employer’s burden to producing only evidence of business justification. In 1991, the Civil Rights Act was amended to overturn that portion of the Wards Cove decision.

    Justice Ginsburg’s dissent in Ricci v. DeStefano suggests that the Griggs conclusion (that Congress aimed beyond “disparate treatment”; it targeted “disparate impact” as well and proscribed not only overt discrimination but also practices that are fair in form, but discriminatory in operation) has been effectively overturned by the Ricci decision.

    I can remember a lot of history, but I enjoyed it as a subject in middle and high school. The issue for many employers is that to find qualified workers, many of them need people ready to hit the job and be productive within a month (rather than the 4 to 6 months that OJT used to provide).

    The other issue is that we all know that a High School Diploma (and to some extents a college degree) isn’t what it used to be 30 to 40 years ago. We graduate students without the ability to read complex sentences, write coherently, or understand basic math. Some companies find that potential hires don’t know how to read a ruler (something you used to learn in elementary school), or follow simple (or complex) instructions due to poor reading ability.

  16. Cranberry, while you may be correct, holding a degree does not show (in some cases) actual intelligence, nor the capability for hard work, and certainly does not take the place of direct work experience.

    In my field, some of the best persons I’ve ever seen were self-taught (IT/CS) and had no degree what so ever.

  17. Cranberry says:

    Bill–true, but good luck getting past HR in many companies.

    IT/CS is an exception to the rule, because being able to write good code is itself a demonstration of intelligence.