College degree seen as better investment than ever

Story highlights

  • Around the world, college graduates earn more than 1.5 times that of adults with high-school diplomas
  • The earnings gap between the low educated and the highly educated in individual countries has widened
  • Statistically, education is one of the best investments
  • But the return on investment and earnings amounts vary widely from country to country

The global financial crisis has made college degrees more important than ever in raising personal income, a new study by the Organization for Economic Cooperation and Development has found.

The difference in earnings between the low and highly-educated has widened from 2008 to 2011, according to the report, which primarily looked at member OECD countries.

For those wavering on the pursuit of a college degree, the data is clear, says Andreas Schleicher, the education directorate of OECD.

"Probably in these times there is no better investment you can make than in your education. Rate of return is in the order of 10 to 15 percent. And then think about what other investments you can make these days where you get a similar rate of return," he says.

In the U.S., for example, the return on a college education for a man is 12.3 percent (calculations looked at men and women separately). This compares with around 6 percent return in the stock market.

To measure this return, a sum of all the financial costs — like tuition, lack of earnings while studying and a higher tax rate that go along with an income increase — were compared against a sum of the benefits, which are the rise in income and greater security against unemployment.

This analysis was performed on 29 countries, which were mostly industrialized nations.

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The study confirms the long-held notion that a degree is universally worth the time and money. On average, college graduates earn 1.5 times that of adults with high-school diplomas.

But it also shows that the returns on investment vary widely from country to country.

Having a degree is the most highly rewarded in the U.S., even after taking into account the high costs. The report finds that the net lifetime benefits of going to college in the U.S. amounts to $365,000 for men.

While a degree is still a good investment in other countries, nowhere are the benefits quite as good as in the U.S.

Higher tax rates lower the returns in some countries, Schleicher says. In Denmark, where tax rates are some of the highest in the world, a college degree will only help a man gain an additional $73,000 over a lifetime.

"You can see that in northern Europe, there's more wage compression. It's the government basically taking the money away from those who are actually highly skilled and earn a lot," Schleicher said.

In places like South Korea and Japan, male workers can expect to make about an extra $150,000 from going to college. These countries lag behind the U.S. simply because employers are not in the habit of dishing out fat paychecks, according to Schleicher.

Nevertheless, the rate of return is greater than most financial investments, and the benefit seems to be increasing as a result of the financial crisis, according to the report.

"There's an increasing premium on better skills. And the people who pay the price for this are the low-skilled, because that work is getting outsourced, getting digitized, getting automated. And the crisis has amplified that," Schleicher said.

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Another explanation for why a college degree is more valuable during a financial crisis is the way companies narrow down job applicants, says James Vere, an economist at the University of Hong Kong, who has researched earnings mobility.

During a crisis there are a lot more applicants for vacancies, and when a company is faced with a situation of many applicants with only one or two vacancies, they use screening rules to filter out candidates, Vere says.

"And one of the very first screening rules is 'Do you have the degree?' And so if the economy is in crisis and you don't have the degree, you won't even make it to the interview a lot of times."

But statistics are only half the story. Vere points out that for anyone considering a new degree, its relevance to career goals is an obvious requirement.

"It's more than just getting a credential," he says. "The reason the degree is valuable is because you've learned some kind of marketable skill. So I think the main focus should be on 'O.K., what do I want my career path to be, and which degree is going to help me attain that goal?' rather just a degree for its own sake."

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