Nov 29, 2005

why didn't they tell me this in 9th grade?

I was reading a nice post on another website a few days ago about average incomes based on education level. I can't remember the site. It's one of the economic ones I read. Since I couldn't find it I just went to get the data at the census site. Here it is:

Avg. Income
9th-12th Grade$22,200
HS Diploma$30,084
Some College$35,160
Bachelor's Degree$53,356
Master's Degree$62,820
Doctorate Degree$88,589

This looks about what I'd expect, except for the doctorate being higher than a master's degree. I've always been told it was a nobrainer than a doctorate was a bad economic decision. What's not shown here though is what this actually means on a current value basis. To get that doctorate degree you have to spend more time in school not earning money and pay out more expenses during that time. There are a lot of assumptions you can make in this type of calculation but I'll keep it simple to just get an answer.

I'll use a discount rate of 10% (a little high perhaps). Assume a flat wage over the lifetime of the average individual (terrible assumption as it would start low and increase over time even in constant dollar terms) and use 75 years as the age of death and the point at which I terminate the calculation. I also won't use any costs associated with the education levels (again a terrible assumption but one whose effects you can ballpark later). And I'm adding a small income for the doctorate during the 5 years in school since I got paid when I got mine. I'm not sure if that's standard or not. So what are the results of the present value (brought back to age 16, the earliest individual in the sample)?

NPV of income
9th-12th Grade$243,398
HS Diploma$272,404
Some College$268,933
Bachelor's Degree$329,371
Master's Degree$320,096
Doctorate Degree$299,991

That's not a huge difference is it? Add in your tuition costs and it all seems to come off as pointless. Get out in 9th grade and work your butt off I say. There are assumptions I've made that make the higher education more attractive but I would have suspected these simplistic assumptions to produce a big difference. One aspect of this calculation is that your wealth is not linearly linked to this NPV. If you assume some minimum amount of income spent towards staying alive (shelter, food, etc.) then the lower NPVs suffer much more. If the NPV of your costs is $240,000 then the 9th grade drop out has no savings and the bachelor degree individual has some money to invest. Nevertheless I will not be showing this information to my daughter.

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