Income Inequality and The Cost of Education

What's the value of a good education?

Hard to say in America, where the quality of education is falling faster than the cultural relevance of my refences, but what we can quantify is what's the value of an education.

Let's look at some numbers.

Below is the average weekly income of a high school graduate versus the average income of a college graduate (bachelor's degree any field).

While this only tells half the story, it's a compelling half already. What we can see from this graph is that the average college graduate earns roughly $23,000 per year more than the average high school graduate, and that that gap is widening by about 1% a year.

Whew, that's problematic if you're that guy without a degree.

But wait, it gets worse.

According to this chart that I totally did not make up (with numbers sourced from 11 years of BLS data), there's a roughly 16 point difference in labor force participation, meaning a college graduate is almost 28% more likely to be employed at that higher wage than a high school graduate is at the lower.

What does this say about the cost of education?

Well, if we assume that 18-year-olds behave in an economically rational manner and that unicorns are a thing, we can calculate what's called a "Net Present Value" of a college degree by taking a discounted future return on the increased earnings and probability of earnings to yield a "value" that a rational consumer should be willing to pay for the privilege of being roughly 30% more likely to be employed at a salary roughly $20,000 higher than they would be without it.

Summing up the tedious math of probability weighted present values of future returns, we can safely say that the "value" of a college education in the United States in 2003 was roughly $188,495. Projecting forward at that growing with that 1% annual gap for the next ten years, someone entering college today would rationally be willing to pay over $200,000, and still come out ahead of their diploma-only counterpart.

Now of course this simplifies the equation quite a bit by ignoring the likelihood of dropping out, which is staggeringly high in the US, but even assuming there's only a 50% chance of graduating, $25,000 per year is where tuition should be based off the economic factors.

Not surprising since the average published college tuition for a four year school ranged from $15,130 to $30,094 for the 2013-2014 school year.

Funny how economics works out like that.

Raw Data (Note Q4 '13 was projected from an average of the previous three quarters since data was unavailable at the time of writing)

BLS (Tables5&6 were used) 

Tuition