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Institute on Education and the Economy


NCEE Brief No. 11, November 1990

The Decision to Start College: Factoring in the Uncertainty

Morton Inger and Eric Larsen


How does a high school graduate make the decision to start college? Economists have treated this question too mechanistically, taking it for granted that a student's program of schooling will be completed, and that it will be completed as planned. But high school graduates face many uncertainties and risks when they are trying to decide whether to attend college, and a rough knowledge of these risks feeds into their decision.

Joseph Altonji, an economist and researcher for the National Center on Education and Employment, has developed a model that takes these uncertainties into account in determining the economic benefit that high school graduates can anticipate from starting college. Although there is a large body of research on the economic returns that a person will realize by investing time and money in postsecondary education, only Altonji and a few others focus on how the uncertainty of educational outcomes affects the decision to start the investment.

Much of the existing research assumes that people know how many years of college to take, what to major in, or what degree to get at the start—and carry through on these plans without fail, and, what is more, that people are actually choosing how many years they will attend or what degree to get at the start. Further, these studies do not take into account that the choice of major often changes during college, and that there are large differences in earnings by field of study.

Uncertainty Does Matter

Uncertainty about education outcomes is significant for four reasons:

  1. For some groups, the returns to education are nonlinear. That is, their economic returns do not get one year better with each year of education; much of the economic benefit is associated with completing high school or college.
  2. Schooling is specialized, and there are prerequisites for particular fields. Subject matter prerequisites, particularly in mathematics and the sciences, mean that course selection in high school or the early years of college determines the options available to individuals. It may be very costly to change fields.
  3. There are large differences in earnings potential between different fields of specialization. If all fields had the same economic payoff, uncertainty over choice of major would not matter.
  4. Individual students are uncertain about their ability and their willingness to complete a program in a particular field. There is a significant difference between plans and realized educational outcomes. Individuals do not know how many years of college they will complete or even if they will attend college. Only 58 percent of high school seniors who planned, in 1972, to complete college had completed college by 1979. And 11 percent of those who planned to complete college had not even started by 1979. Further, many people cannot really choose at the start; they have to make their decisions year by year.

The standard assumptions ignore these uncertainties. A man who begins college and later drops out, having paid the tuition and not earned any money while in school, receives little or no economic payoff. The economic yield comes only with graduation.

Measuring the Returns Under Uncertainty

Altonji begins by estimating the probability that a high school graduate will achieve one of eighteen postsecondary educational outcomes: less than two years of college; more than two years of college; a four-year degree in one of ten majors; an advanced degree in one of six fields. He estimates the economic returns for someone who achieves each of these outcomes in comparison to those for a high school graduate.

He calculates how this return will vary for different categories of high school graduates:

  • men and women,
  • students with a favorable and unfavorable family background (defined by the amount of education of the parents),
  • students educated in an academic and nonacademic high school curriculum, and
  • students with high and low ability.

Based on this calculation, Altonji develops a "rate of return"—essentially, the yield or dividend—that a high school graduate can anticipate from the investment of his or her human capital in a college education.

Findings

Altonji's calculations reveal significant differences between the results for men and women. Women derive a much greater economic benefit from starting college than men do. The most likely explanation is that men who do not go to college often find manufacturing and construction jobs that pay relatively well, while most women who do not go on to college tend to find only low-paying clerical and service jobs. (Altonji is currently testing these findings in light of new data.)

College Completion

The differences in economic outcomes for men and women who leave college before they have completed two years are dramatic. For men, most of the economic benefit from attending college is associated with obtaining a degree. In fact, if they attend fewer than two years, they do no better economically than men who go straight into the labor market upon completing high school.

For women, attending college, but not completing two years, makes it possible for them to achieve higher-paying positions than those who enter the labor market straight from high school. Therefore, the expected benefit from college education depends more upon getting a degree for men than it does for women.

Family Background and Course Work

For men, a favorable family background or an academic curriculum in high school makes a substantial difference in their economic returns from postsecondary education. This is because these background variables affect college completion. For women, neither measure seems to make a large difference; attending college makes the big difference, even if they have had an unfavorable background or have taken a nonacademic high school curriculum.

Ability

There is a large difference between the results for men with high ability and men with low ability. Men with lower ability get no significant economic benefit from starting college compared to entering the job market from high school. Ability affects college completion, and, for men, completion makes the chief difference. For women, while ability clearly is important, it does not make as big a difference, in percentage terms, as ability measures do for men. For women, any postsecondary education yields significant economic returns.

Implications of the Uncertainty

Economists usually estimate a relationship between earnings and a set of education outcomes, such as the number of years of schooling. That approach would find that there was no value to the first year of college. But that ignores the fact that you cannot complete college unless you start that there is an "option value" associated with each level of education.

To determine the value of a mathematics program in the freshman year of college, one should look at the options that that program leads to and then weight the values of those different options by the probability that they would be realized. The more lucrative the ultimate outcome of a particular line of effort, the greater the rate of return from starting it. If a particular college degree, once obtained, is valuable, it raises the value of starting college.

The key issue then becomes: What factors increase the likelihood that a person will get the payoff that comes only with completion? Those factors will have large effects on the value of starting college.

Altonji's model demonstrates that certain factors increase the odds that the person will graduate. Although the model needs to be refined and supported by more empirical data, certain conclusions can be drawn at this time. Favorable family background, academic ability, and an academic high school curriculum are all associated with higher economic returns from education; and Altonji's model shows that they have that positive effect because they raise the probability of graduation. In other words, one significant way that ability affects the economic returns is by affecting which education outcomes occur.

While it is conventional wisdom that certain school and family characteristics are important, Altonji's work develops and implements a model that can be used to estimate the effect of parental background, high school curriculum, academic ability, race, and gender on the likelihood of achieving specific educational outcomes.

References

Altonji, J. (1991).The Demand for and Return to Education When Education Outcomes are Uncertain (Technical Paper No. 21). New York, NY: National Center on Education and Employment.

Altonji, J. (1990). Accounting for Uncertain Educational Outcomes in Estimating the Return to Education (Technical Paper No. 15). New York, NY: National Center on Education and Employment.

Altonji, J. (1990). The Effects of High School Curriculum on Education and Labor Market Outcomes (Technical Paper No. 16). New York, NY: National Center on Education and Employment.

Altonji, J. (1988). The Effects of Family Background and School Characteristics on Education and Labor Market Outcomes [Mimeo]. New York, NY: Department of Economics, Northwestern University.

 

 


 

Institute on Education and the Economy, Teachers College, Columbia University
525 West 120th Street, Box 174, New York, NY 10027
Phone: (212) 678-3091 | Fax: (212) 678-3699 | iee@columbia.edu