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A university degree is not a risky investment

Hate to spill the good news: degree holders on average earn more and have fewer periods of unemployment.

By LÉO CHARBONNEAU | OCT 03 2011

I wanted to respond, somewhat belatedly, to the Globe and Mail article of early last week that questioned the value of a university degree. It was just the latest of what seems to be a lengthening list of such articles. Indeed, yesterday’s Cross Country Checkup phone-in radio program on CBC was also on this topic. I wasn’t able to tune in, but I can guess at the direction the discussions took based on the program’s title: “Is the value of a university education being oversold?”

I’m not quite sure why some Canadians seem to find it so difficult to accept the good news that a university degree is a worthwhile investment. The evidence is overwhelming that, on average, a university graduate earns significantly more than either a high school or college graduate. Generally, a university graduate also has greater flexibility in his or her career and fewer periods of unemployment. As investments go, it’s a very good bet.

The Globe and Mail article of last week starts off with the statement that “Canadian universities can offer no firm guarantee of a return on investment in that expensive piece of paper.” This is a classic straw man argument. Very few, if any, legitimate investments can offer an absolute guarantee of a specific return, and I don’t know of anybody making such a claim for a university degree. But, if students are motivated and engaged in their studies, it is likely they will benefit greatly from their university education.

The Globe article does note, however, that nearly one in five university graduates wind up at the low end of the income scale, and that this percentage is higher than in any other OECD country. I will leave out the discussion of inter-country comparisons because the comparability of the data is difficult and uncertain. Nevertheless, we’re still left with the claim that 18.5 percent of university graduates earn less than half of the country’s median income of $37,000. How can this be? I passed that question on to a senior analyst at the Association of Universities and Colleges of Canada, and here is his view.

First, he suggested we remove immigrants from the equation so that we are only counting degrees earned in Canada (we are, after all, talking about the value of a Canadian degree). While immigrant status is not a perfect match for degrees earned in Canada versus those earned abroad, it is a fairly good “proxy” measure. Doing this, the number of non-immigrant degree holders who earned less than half the medium income drops to 15.9 percent.

As well, there is a higher likelihood that younger people and those nearing retirement are working part time. And, it is likely that the OECD data does not account for people whose primary activity is not work – i.e., they are studying, at home parenting or some other activity. So, if you look at the primary earning years of 30 to 54 and restrict the analysis to those working full-time, then just 3.9 percent of degree holders are earning less than half the medium income. And then, of those, roughly half are self-employed and drawing very little income. This graph shows the step-by-step analysis:

This analysis above may sound like a rationalization to some, but I think it makes sense. What’s more, we ignored the fact that certain degree holders do tend to earn less than the national average – in particular, those with a degree in the fine arts. I am making no judgment on such a career choice, but  I suspect these individuals understood ahead of time that the fine arts is not likely to be a path to riches. And finally, there is no doubt a small percentage of degree holders who were disengaged with their studies, did the minimum required to complete their degree and simply lack motivation to succeed.

One other problem with the Globe article is that it leaves the impression that degree holders who are currently earning low incomes are permanently stuck in that position. University graduates may indeed experience job disruptions, and a certain percentage will confront that reality in any given year. But, it does not tend to last long.

One final word: it is also, I think, shortsighted to think of a degree as only a financial investment. There are other, more personal, rewards to the pursuit of higher learning.

Bottom line, I think it is irresponsible to claim that a university education is a risky investment.

ABOUT LÉO CHARBONNEAU
Léo Charbonneau
Léo Charbonneau is the editor of University Affairs.
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  1. Allan McDougall / October 3, 2011 at 11:39

    I wholeheartedly agree with you. Spurious, biased research on the part of G&M.

  2. susan bloch-nevitte / October 3, 2011 at 12:08

    Alas, you didn’t miss much on CBC’s Cross Country Checkup that you haven’t heard before. The most astute comments came from a university graduate who priased his education as providing the critical “soft” skills that have well prepared him for his life and his career (as a standup comic).

  3. JoVE / October 3, 2011 at 18:38

    Thanks for this analysis. I think it works very well.

    One thing I think could be discussed in a more subtle way generally is that a university degree doesn’t provide you with everything you need to get a decent job, or a specific type of job. A university education offers an opportunity to develop a whole range of skills and gain experience alongside the knowledge that is the formal part of the degree. A narrow instrumental focus on “what can you do with that” is misleading is multiple ways. And foregoing all other activities to concentrate on high grades may be a poor choice. Not that anyone needs poor grades but B’s are not poor grades especially if you were also the president of a student association, or captain of a sports team, or got involved in fundraising for a local charity …

  4. Ken Steele / October 5, 2011 at 06:31

    Thanks, Leo, for investigating the OECD statistics further, and offering some new subtleties in that data that help to explain an abnormally poor result on that measure. Like most of your readers, I find it hard to believe that Canadian universities are doing what they do less well than so many other countries!

    My points, mentioned in the Globe&Mail article, weren’t really about the OECD data, though, and I think I may have been the one to say that some students are being “oversold.” Academica’s surveys of university applicants have made it clear for 15 years that more than 90% of students are driven to university for career-related reasons. (As a liberal arts grad myself, I think it’s sad that about a third of them completely overlook the personal benefits of education, but I can hope that they will become more enlightened in their freshman year.)

    But the overwhelming majority of high school graduates, and their parents, accept the claim of a “million-dollar benefit” to a university degree, without comprehending the many qualifications that should be added to the promise:

    – this is an average — not even a median. It obscures the growing division between Canada’s wealthiest citizens, who naturally tend to have degrees, and Canada’s poorest university graduates.

    – it makes the assumption that a university degree is a student’s most important earnings-related credential. Even if a student earned a college credential before going to university, or went to college after university for a postgraduate diploma program, the college contribution is rolled into the university degree.

    – the “million-dollar” stat obscures the vast discrepancy between graduates of different programs at university. This is a key graph that more high school students and their parents need to examine. A degree in the humanities is sadly far less likely to generate the million-dollar ROI, while a medical, engineering or law degree inflates the overall average ROI.

    – the claim that a university degree adds a million dollars to your lifetime earnings also does not take into account the fact that most university graduates had a socioeconomic advantage going into their university education. High school grades remain a key criterion for admissions, and remain stubbornly tied to household income despite the best efforts of the education system. No study has yet tried to disentangle graduate earnings from their parents’ SES, but that might also be a telling statistic.

    These are some of the reasons I think it’s not unreasonable to argue that some students and their parents have become “oversold” on the value a university degree promises for their career earnings. It’s certainly not to say that Canadian universities are any different from their counterparts elsewhere in the OECD. But the unfortunate combination of rising tuition and a proliferation of media rankings has turned students consumerist, has them expecting that they can “invest” tuition dollars and expect a return, when in fact the value of one’s education is much more contingent on personal effort, affinity and talent.

    Many students flocking to our universities would in fact be better served (financially and in some cases intellectually) by taking an apprenticeship or a college program. Many students blindly assume that a degree in anything will earn them top-flight career returns, when sadly the statistics do not bear that out. And assertions of the “million-dollar benefit” serve as self-fulfilling prophecy, drawing more and more students toward university as a career panacea promising a financial ROI, when in fact, as you say, it should be much more than a financial calculation.

  5. Leo Charbonneau / October 5, 2011 at 08:38

    Thank you, Ken, for those comments. I didn’t specifically mention the million-dollar benefit in my post, but I think you make some very good points about this figure that parents and students need to consider — a valuable contribution to the discussion. One other thing we all need to keep in mind, as the mutual fund companies always hasten to remind us, is that past results are no guarantee of future performance. But I’m confident the value of an undergraduate degree will hold up.

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