Bureau of Business Research College and Graduate School of Business, University of Texas at Austin February 1995 What Is a College Degree Worth? In the last few years the number of well-paying jobs available to young persons with no college education has been shrinking. The remaining jobs pay much less in real terms than two decades ago. Observing these trends, high school graduates are now borrowing at record rates to finance college degrees. 1 • But how much is a college degree really worth? Considering cost as an investment, what sort of rate of return can an individual expect? Will it pay more than the rate of interest on a college loan? An outgrowth of a recently released study, "Economic Contributions of the University of Texas System,"2 this article provides a general answer, based on average costs in a public Texas college or university and average wage gains from four years of college education throughout the nation. The assumption is that Texas gradu­ates, both male and female, will do at least as well, on average, as graduates from institutions in other states. • All academic units of the UT system offering a bachelor's degree were included, so it is believed that the average costs within the system are reasonably representative of all the public higher education institutions in Texas. The calculated rates of return relate to undergraduate degrees only. Our data on wage gains were restricted to four years of higher education, so an effort was made to include only those costs pertaining to undergraduate programs. (For example, we ex­cluded the costs associated with research pro­grams.) The rates of return were calculated on the premise that the student, taxpayers, and donors together make a certain outlay on each student for four years. All-especially the student-expect that as a result the graduate will earn more in wages than would have been likely if the student had entered the labor force after high school and received no subsequent formal education. Although we followed a now standard method, pioneered over two decades ago by Nobel laure­ate Gary Becker of the University of Chicago,3 our report is unusual in two respects in addition to using costs specific to the state of Texas: we calculated separate rates of return for men and women, and we calculated for each gender separate rates of return for the student alone and for the state's residents as a whole, including taxpayers and donors as well as the student. We call the latter two rates of return, respectively, the private rate and the social rate. Measuring the Benefits The benefits in terms of working-life wage gains are illustrated in the figure. The projected earnings depicted are for men, but the chart for women (not presented because of space limita­tions) shows almost exactly the same relative wage gains from four years of higher education. Both high school and college graduate wages are somewhat lower for women than for men, but the relative gains, about 65 percent, are essentially the same. Although derived from a cross section survey at a given time,4 the data are adjusted for historical growth of real wages to convert them into longitudinal data. The data represent real (inflation-adjusted) wages, so the differences are also real. Note that the figure covers a hypothetical period beginning at age 18, when the high school graduate either enters the labor force for life or goes to college, and ending with retirement at age 65. Ifthe high school graduate goes to college, he or she delays entering the labor force four more years, but is assumed to retire at the same age. So tDfI I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr the college student has zero earnings in the first four years of the period beginning at 18, while the former high school student is earning positive amounts. However, almost immediately upon graduating from college, the former student begins to earn more than his or her noncollege counterpart; and the difference increases through­out their remaining working lives. It is the wage gains that are discounted to the present in calculating the rate of return to invest­ment in a college education. For purposes of the private rate of return, they are after-tax; for the social rate of return, before-tax, because taxes paid are not lost to society as a whole. Measuring the Costs The costs of a college education fall into three general categories: wages foregone while in school, direct costs borne by students, and indi­rect costs borne by taxpayers and donors. Wages foregone are calculated as three-fourths of the wages earned by the high school graduate di­rectly entering the labor force because it is assumed that the college student is free to work in summers. Even with the adjustment, this is the largest component of the total cost to the student in a Texas public institution. Direct costs include tuition, fees, books, some travel, and the excess of living costs in college over what they would have been for a high school graduate worker of the same age.5 The latter costs plus the after-tax wages foregone constitute the total private costs relevant to the private rate of return calculation. The total social costs are the sum of wages foregone before taxes, the direct costs mentioned above, and the taxpayer and donor contributions. These two sets of annual costs for both men and women, estimated as the average for all academic units in the University of Texas system, are shown in the table. The private costs are $4,700 per year less than the social costs for men; $4,200 per year less for women. At both private and social levels, the difference between men and women results entirely from the difference in earnings foregone while in college. The Calculated Rates of Return We now find the rate of discount that equates the present values of the costs and net wage gains, respectively. At the private level, the cal­culated rates of return are 14.6 percent per year for men and 14.5 percent per year for women. At the social level, the two rates of return are 14.2 percent per year for men; 13.3 percent per year Figure Projected Earnings of University Graduates vs. Nonuniversity Graduates (Male) Annual before-tax earnings 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 ----Nonuniversity graduates adjusted for annual growth (male) -G-University graduates adjusted for annual growth (male) tDfI I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr jll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I l'Ar Table Annual Costs per Student in College Costs Men Women Private costs: Earnings foregone, after tax 9,600 7,900 Direct student-borne 6,100 6,100 Total 15,700 14,000 Social costs: Earnings foregone, before tax 12,000 9,800 Direct student-borne 6,100 6,100 Taxpayer and donor contributions 2,300 2,300 Total 20,400 18,200 for women. Women have a lower level of earn­ings foregone than men; therefore, the taxpayer subsidy to them, while absolutely the same, is relatively larger. Comparatively speaking, just how high are these numbers? Recall that because they are cal­culated from inflation-adjusted numbers, they are real rates of return. Therefore, they are to be compared with inflation-adjusted interest rates on alternative investments or college loans. Cur­rently, the rate of inflation is between 2.5 percent and 3.0 percent per year. A rate of return of 8.0 percent on a long-term government bond is there­fore a real rate of 5.0 to 5.5 percent. A college loan at 9 percent per year represents a real cost of 6.0 percent to 6.5 percent. These rates are less than half the calculated real rates of return on an average investment in a college education in a Texas public institution. Although the calculated rates of return are averages and do not predict the results of the private or social investment in any given individual student, they seem to indicate convincingly that the typical investment in a college education pays off exceedingly well for both the student and society as a whole. -Stephen L. McDonald Professor ofEconomics and Senior Fellow, Bureau ofBusiness Research University ofTexas at Austin Notes 1. Amy Wallace, "Borrowing for College Hits Record Level," Austin American-Statesman, December 2, 1994, p. A18. 2. Prepared at the request of the office of the Chancellor by the Bureau of Business Research, the study consists of three parts: Part I, "Investment in Human Capital," by Dr. Stephen L. McDonald; Part II, "Economic Impacts of the Business Activi­ties of the University of Texas System Components," by Dr. Milton Holloway (with Dr. Jerry Olson); and Part III, "A Survey of University of Texas System Services: Capturing the Hidden Benefits," by Dr. Mina Mohammadioun. Kimberley Jordan, graduate student in economics, helped with the calculations in Part I. 3. See his Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, 3rd ed., Chicago: Univer­sity of Chicago Press, 1993. 4. Current Population Survey, U.S. Department of Labor, March and May, 1991. 5. "Fall/Spring 1994-95 Student Base Budget: Federal Method­ology," mimeo, University of Texas at Austin, 1994. Charting Economic Change: Texas Business Review in 1994 December Operation Hold-the-Line: The Effects on Business Activity in El Paso, Frank D. Bean Charles W. Haynes, David Spener, Roland Chanove, Robert G. Cushing, Rodolfo de la Garza, and Gary Freeman Environmental Regulations and the Costs ofCompliance, Christopher H. Stinson October The Size and Distribution of Two Minority Population Groups in Texas, Robert K. Holz August Remote Workers and the Changing Workplace, Keri Pearlson An Internet Primer, Sylvia L. Cook June An Integrated Approach to Environmental Protection, Stephen L. McDonald and Mina Mohammadioun Tax Incentives and Abatements: Economic Boon or Boondoggle? Bernard L. Weinstein April Texas Taxes: A Comparison with Other States, Charles P. Zlatkovich The Future ofthe Maquiladora Industry: Lessons from Asia, Elsie Echeverri-Carroll February What Determines Economic Growth? David M. Gould and Roy J. Ruffin Excellence and Efficiency in Texas Public Schools, Victor L. Arnold, Indranil R. Bardhan, and William W. Cooper Back issues of Texas Business Review are distributed free upon request. For information, contact the Bureau of Business Research, (512) 471-5179. jll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I l'Ar jlllllllll lllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllDr How Can the Internet Be Accessed? The Internet is essentially a cooperative "net­work of networks," so there is no central owner­firm or office providing information or access (at least at this time). Typically, access is gained through an organization or firm already on the Internet or through cooperative arrangements with a business, university, or institution with Internet access. However, the fastest growing alternative for small and medium-size businesses is to contract access through a new type of business called an Internet service provider. These firms purchase and set up a major Internet connection, then resell access and often a variety of software, consulting, and training options to their clients. Service pro­viders are so new, they may not be listed in local phone books, but instead found through recom­mendations from university computer center managers or through firms already on the net­work. (Warning: books that offer immediate Internet access seldom fulfill that promise.) Large businesses may be able to obtain a direct Internet ­connection. Simple e-mail access is available through any of the above mentioned commercial services and usually available in a kit from computer stores or by calling 800 numbers given in computer maga­ zines. These companies are very limited so far as the range of Internet services is concerned, but eventually they may offer more than access to e­ mail. What Equipment Is Necessary? Most small businesses set up for connection via a 386+ generation of IBM-type personal computers or current Apple Macintosh models. At the minimum, a 9,600 baud modem, prefer­ ably a 14.4 one, both now in the $100 range, is required. The modem connects the computer to ordinary telephone lines. Most current communi­ cation software programs make it possible to use the Internet in a text mode. Graphics require special packages, available usually from the Internet access provider (some of this software can be downloaded free of charge or for a contri­ bution). Typically, these connections are to a machine that is already on the Internet, with access available via the user's screen and com­mands. For full and quality use of the Internet, a digital phone line (provided by local phone companies) and access to an Internet service provider are necessary, as are a special communications interface board and software for this digital connection. Other options exist, and new ones are appearing monthly, including the more expensive location of the user's own high capacity com­puter as a "net server" on the Internet. What's Next? Interest in the Internet is virtually exploding. Rough estimates cite about 20 million Internet users worldwide, with perhaps 100,000 new users joining each month. This combined with the lessening of government subsidy will surely re­sult in more commercialization of Internet access and services. Internet service providers are crop­ping up everywhere. Some cable companies want to offer Internet connections. Once local tele­phone regulation is sufficiently relaxed, local telephone companies will also likely become access providers. The opening of the Internet to hordes of new users will mean easier access, better software, and more practical direct applications to business. Because it still requires special effort to get on the Internet, business growth has been mostly oriented to technical businesses, business-to­ business, and business-to-government connec­ tions. However, most observers agree that with easier residential connections, business-to­ customer links will bring still greater growth to Internet use. This is already well under way in terms of on-line catalogs, FAQs pages for cus­ tomers, and e-mail services for troubleshooting. Security for credit card ordering is improving. In fact, flowers or pizza can be ordered via the Internet. Only our imaginations limit the business-to-business and business-customer innovations to come. -Frederick Williams Director, Center for Research on Communication Technology and Society University ofTexas at Austin jlllllllll llllllllllllllllllllll lllllllllll llllllllllllllllllllllllll llllllllllllDr ltlllll lll lllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllUr A Glimpse at the FAQs of Life: Business-to-Business Use of the Internet At the fifth conference on Making Money on the Internet, hosted by the University of Texas IC2 Institute, someone told how a small software development firm overcame formerly insur­mountable odds to get a project preproposal to the U.S. Department of Commerce within several hours before the application deadline and only 72 hours after learning of the opportunity. The firm's owner only learned of the contract opportunity at a Friday dinner party. The receipt deadline was Monday at noon. Using a friend's personal computer that was linked to the Internet and some network navigation advice, the soft­ware entrepreneur was able to log on to a federal computer, and he downloaded the Request for Proposal and the required outline for prepro­posals. He even found a separate on-line file of notes from the bidder's conference. He and his partners worked all weekend to complete the proposal, using the Internet to exchange notes with a consulting firm and to check several software products databases to be sure they were not duplicating the efforts of others. By 4 a.m. Monday, they transferred the proposal file over the Internet to a colleague in Washington, D.C., who downloaded it, printed the required ten hard copies, then hand-delivered them to a federal proposal receipts office before the noon deadline. (Most federal agencies do not, as yet, accept on­line or faxed proposals.) The ending was happy: the firm got an invitation for a contract. This is just one of many stories about business use of the Internet. Use is exploding among businesses of all sizes, particularly technology­related ones. Noteworthy is that many small "information-intensive" businesses, typically unable to afford to support or maintain member­ships in expensive data networks, are tapping into this network. Business-to-business use-or among businesses, nonprofits, government, universities, consultants-is one of the fastest growing uses of the Internet. Current users or service providers, including university computer managers, are the best sources of Internet information. Local chambers of commerce, community colleges, or universi­ties are often willing to organize presentations or seminars for groups and businesses. Books on the Internet abound, so the computer section in local bookstores is another good source of information, as is the magazine Internet World (1-800-573­3062). For starters, however, here are some brief, practical answers to frequently asked questions (or "FAQs" in Internet lingo) about one of the most creative network developments of our time. What Does the Internet Offer? The Internet provides access to the world's largest global electronic mail ("e-mail") system, including e-mail exchange with commercial on­line services such as America Online, Compu­Serve, Prodigy, or MCI Mail. The Internet can be used to transfer files, graphics, images, and entire documents. This includes gaining access to gov­ernment, and now commercial, bid announce­ments, press releases, agency and personnel directories, to name a few examples. Business-to-business uses include e-mail, file, and computer program exchanges with suppliers, consultants, or marketing firms. The Internet can also form the telecommunications backbone for consultants working with selected clients who are on the "net," or it can form the basis for a busi­ ness and its consultant partners to form a virtual team or firm without the need to be in one office. Professional writers or researchers can use the Internet not only as a research tool but also to conduct their business exchanges with editors or clients. Internet navigation (like Mosaic, World Wide Web, and Gopher) and search software (Archie, Veronica) can locate almost any kind of informa­ tion or information provider. Businesses can post announcements, queries, or even create an attrac­ tive graphics "home page" directory linking their announcements, available documents, products, and services. Internet also makes it possible to join informal or discussion groups (Listserv, Newsnet) to locate or exchange ideas about pro­ ducts, markets, business development, or interna­ tional trade opportunities. These groups, along with e-mail, can locate and request information from experts, organizations, research laboratories, or other sources. Finally, the Internet also con­ tains abundant information on FAQs about itself. (continued on preceding page) ltllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll lllUr Jtl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I lltr Announcements At press time, work on th~ 19.95 Directory of Texas Manufacturers d~tabase was nearing ,. 4 completion. Each year, Bureau staff members ": survey the state's manufacturers to gather infor­mation on new companies and update data on existing ones for publication in Jhe directory. The 1995 edition of the two-volume reference should be available late in March. Texas Industrial Expansion newsletter supplements the annual directory with monthly reports on new and expanding manufacturing companies. The 1995 Directory of Texas Manu­facturers and Texas Industrial Expansion are available as a package for $130 plus tax for Texas residents, or Texas Industrial Expansion may be purchased separately. Both publications are available in electronic format. To order by phone, call (512) 471-1616; by fax, (512) 471-1063. A subject index for the Texas Business Review, 1975-1994, is now available from the Bureau of Business Research. You may request a copy by e-mail to "bbr@utxvm.cc.utexas.edu"or by using the above phone and fax numbers. Editor: Lois Glenn Shrout Assistant Editor: Sally Furgeson Texas Business Review is published six times a year (February, April, June, August, October, and December) by the Bureau of Business Research, Graduate School of Business, University of Texas at Austin. Subscriptions to Texas Business Review are available free upon request, as are back issues. Research and service activities of the Bureau of Business Research concentrate on the ways Texas industries can become nationally and glo­bally competitive. The Bureau is policy oriented and dedicated to public service. An integral part of UT Austin's Graduate School of Business, the Bureau is located on the sixth floor of the College of Business Administration building. Our e-mail address is: bbr@utxvm.cc.utexas.edu. 33I~Y~B ~ ,V~l ~g 3Hl S~Oll SIO~JY SlVIY3 ·p3lS3Db3.I UOJ:P3.l.IO:> SS3.1ppy 6~tL-£Il8l smc~i 'uµsny 6~tl xog "O'd 0£91 'ON lJW.li\I ~'upsny Cl IV d aB1llsOd ·s·n ·~lIO .LL!IOlldNON