Why study economics? NZ graduate earnings edition

I have posted before on why studying economics is a good idea.

Recently though, I was pointed to the Careers NZ website, which has a useful tool ("Compare Study Options") that compares the earnings of graduates of various disciplines. It uses data from the excellent Integrated Data Infrastructure from Statistics New Zealand, which is a relatively new and exciting database combining datasets from many sources.

I had a bit of a play with the Compare Study Options tool, and this is what I found when comparing Economics and Econometrics graduates with graduates from the Management and Commerce disciplines:

Now, I have no idea what the standard errors are like in these median salaries (and the full 2013 report on the Education Counts website from which these median salaries are taken doesn't say either), but I imagine that there isn't much to choose between many of the majors. But there are some clear things to see here:

• Tourism is clearly on the bottom in terms of expected salary for graduates. Slightly above Tourism are Sales and Marketing and Business and Management. The other majors are clearly above those three.
• All majors increase salaries with more study with the exception of Banking, Finance and Related Fields, where Honours graduates earn more than Masters graduates. Maybe that's a small sample size issue?
• Economics and Econometrics improves in ranking and relative earnings with more study, compared with the other majors.

The latter bullet point is the important one. Studying economics is associated with higher graduate salaries, particularly at higher levels of study. Note that we can't say for sure that there is a causal mechanism here. Economics and Econometrics might lead to higher earnings, but there are a number of reasons why Economics and Econometrics graduates may earn more than graduates in Management and Commerce disciplines. Jonah Sinick recently outlined the reasons in a pretty comprehensive way (see here for the general considerations, and here for further exploration of the data). In short, he suggested three reasons (drawn from Bryan Caplan here):

• Human capital acquisition: Education develops students’ employable skills. 

• Ability bias: Obtaining an educational credential reflects greater or lesser pre-existing ability (that exists independently of what’s learned in school), which is later reflected in earnings. 

• Signaling: An educational credential signals pre-existing ability (which as before, can be independent of what’s learned in school) which makes employers more likely to hire one

Under the first reason, if Economics and Econometrics creates greater human capital than other majors, then that higher human capital is rewarded in the labour market with higher salaries. Under the second reason, Economics and Econometrics graduates may have higher ability than graduates of other majors, and that higher ability is rewarded in the labour market with higher salaries. Under the third reason, a degree with an Economics and Econometrics major signals to employers that graduates are high quality, perhaps because Economics and Econometrics is a more difficult major than other majors. So Economics and Econometrics majors find it easier to get higher-paying jobs because of the value of the signal to employers.

Like Jonah, I believe the publicly available data (such as on the Careers NZ website or in the related report) on their own don't give us enough to be able to disaggregate these effects. As a teacher of economics, I would hope it is a human capital thing, but having taught both first-year and graduate economics for a number of years I strongly suspect that ability bias is significantly more at play than human capital. And signalling is ever-present in markets with incomplete information. At this point, I don't see any reason to disagree with Bryan Caplan, who suggests 10% Human Capital, 50% Ability Bias, and 40% Signalling.

[HT: Dan Marsh; also Guido Stark of Statistics New Zealand]