NCPA - National Center for Policy Analysis

Returns On Education Lower Than Expected

October 3, 2002

The accepted literature on educations states that education gives a high rate of return in future income per year of additional schooling. But a new study finds that returns to education are far lower than previously thought and may reflect innate qualities of individuals independent of schooling.

The study analyzed data from the National Longitudinal Survey on Youth. Despite literature claiming that education has large returns, the analysis revealed otherwise:

  • Local returns of education are very low from grades 1 to 11 -- 1 percent or less a year.
  • The returns increase to 3.7 percent in grade 12.
  • Only in the second and third years of college do the returns reach a large return of over 10 percent.
  • The average rate of return reflects similar trends -- it increases smoothly from 0.4 percent return in grade 7 to 4.6 percent for college seniors.

Previous studies also claim that unobserved market ability is completely unrelated with returns on schooling. The new research finds evidence disproving this assertion as well. According to the analysis, unobserved market ability has a positive correlation to returns on schooling of 0.28 -- a significant correlation. This suggests that people with certain attributes will get larger returns on education than those without them.

Source: Christian Belzil and Jorgen Hansen, "Unobserved Ability and Returns on Schooling," IZA Discussion Paper No. 58, May 2002, Institute for the Study of Labor.

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