Earnings gap between college grads, high-school grads overstated

Here's an addendum to our October 2009 cover article, Is a College Education Still Worth the Investment?: The long-touted lifetime-earnings gap between college graduates and high-school graduates isn't as wide as commonly reported.

The Wall Street Journal has details in a story that bears out some of the analysis in our cover article.

In recent years, the nonprofit College Board touted the difference in lifetime earnings of college grads over high-school graduates at $800,000, a widely circulated figure. Other estimates topped $1 million.

But now...some researchers are questioning the methodology behind the high projections....

The problem stems from the common source of the estimates, a 2002 Census Bureau report titled "The Big Payoff" (PDF). The report said the average high-school graduate earns $25,900 a year, and the average college graduate earns $45,400, based on 1999 data. The difference between the two figures is $19,500; multiply it by 40 years, as the Census Bureau did, and the result is $780,000.

There at least two significant problems here: 1) An average is just that - it isn't predictive of actual personal experience; 2) The earnings estimates from the College Board don't take into account any debt incurred in earning a degree. In other words, the estimates show only the revenue side of the picture, but ignores the ongoing liability incurred in an effort to produce that future income.

The WSJ notes that some researchers have been disputing the $800,000 for years, yet the College Board has continued to overstate the earnings gap.

[The Board] recently said on its Web site: "Over a lifetime, the gap in earning potential between a high-school diploma and a bachelor of arts is more than $800,000...."

The $800,000 number, it turns out, was pulled from a footnote of the College Board's 2007 "Education Pays" report (PDF) that explained lifetime earnings. The report's author, Sandy Baum - an emeritus Skidmore College economics professor who didn't write the promotional text on the Web site - says that $450,000 is actually a more reasonable estimate of the difference in lifetime earnings.

A College Board spokeswoman told the WSJ that the person writing the website copy apparently "misinterpreted the data." No doubt. But that same misinterpretation has been going on for about eight years now. Perhaps now that the Wall Street Journal has blown the whistle, the misinformation will be corrected.
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Joseph Slife is a contributing author and editor for SMI. Visit www.soundmindinvesting.com to learn more.