Tuesday, 25 August 2015

Why study economics? Even if you won't be an economist edition...

Last year there was an interesting article in the Journal of Economics Education by Thomas Carroll, Djeto Assane, and Jared Busker (all University of Nevada, Las Vegas) entitled "Why it pays to major in economics" (ungated earlier version here). In it, the authors use data from the 2009-2012 American Community Survey to look at the earnings of degree holders, by major. Importantly, because of the size of the dataset (millions of observations) they are able to control for not only the demographic characteristics of each person, by their job type (a combination of occupation and industry) and location. That means that their results show the relationship between college major and earnings for people in the same job.

They find that overall both male and female economics majors earn more than other majors (which other studies have found too), but importantly:
When we added occupational controls, we found that the average male Bachelor of Arts in economics major earns 8.64 percent more than his non-economics-major counterpart working in the same type of job. The advantage for female economics majors is 5.37 percent more than their counterparts of the same age, ethnicity, and job, who have different majors...
Essentially, about two-thirds of the bachelor's degree premium for economics major can be attributed to the type of job economics majors perform, and about one-third is a premium that economics majors earn over other workers within the same job.
In other words, economics majors tend to be employed in jobs that pay more on average than other jobs, but this only explains two-third of the extra earnings that economics majors receive. So, even if you aren't employed as an economist, these results suggest that there is an earnings benefit to having an economics undergraduate major (the authors also show there are benefits for economics majors who have done further study as well).

Is there something intrinsic about economics majors that lead to these higher earnings? Carroll et al. quote this earlier paper by Black, Sanders and Taylor (ungated here):
In a good undergraduate economics program, students develop an ability to think critically: They gain broadly applicable analytic and quantitative skills that improve decision making in a wide range of tasks. In short, it may be that economics majors are better trained than many other majors in skills that have returns in the marketplace.
I would agree with that - economics does provide students with skills that are both widely applicable, and in demand. Of course, that attributes causality to the relationship between economics major and earnings, which may be problematic. Maybe it is that economics students are naturally more intelligent, harder working, or just generally better employees and are rewarded with higher wages as a result? More research needed, but I would still argue that the case for completing an economics major is very strong.

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