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posted on 16 April 2016

The Role Of Option Value In College Decisions

from the Richmond Fed

-- this post authored by Jessie Romero and Nicholas Trachter

Despite the large and persistent wage premium earned by college graduates, college enrollment and graduation rates remain relatively low, particularly for students from lower-income families. Economic models that highlight the role of risk and option value in higher education decisions can help explain these trends.

The pattern of wage differentials across workers with different levels of education has been described as a "race between education and technology." When new technologies increase the demand for skilled workers, their wages initially rise relative to less-skilled workers. But eventually, the wage premium encourages more people to obtain the necessary education, leading to an increase in the supply of skilled workers and a narrowing of the wage gap.

As Claudia Goldin and Lawrence Katz of Harvard University have documented, a good example of this education-technology race occurred during the first half of the twentieth century, when new machines, such as typewriters, created greater demand for workers with high school educations. These new clerical jobs paid about twice as much as jobs that required less education, a wage gap that helped spur a dramatic increase in high school graduation rates. However, as the supply of high school graduates increased, the wage premium associated with high school completion fell significantly.

[click on image below to continue reading]

Source: https://www.richmondfed.org/-/ media/richmondfedorg/publications/ research/ economic_brief/2016/pdf/eb_16-04.pdf

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