Sunday 14 June 2020

A trade-off between grades and future earnings?

As a university student, would you rather have higher grades, or higher earnings in mid-career? It may seem like this isn't a choice you would have to make. After all, it is reasonable to believe that, on average, students with higher grades will end up earning more later in life. So, let me re-frame the question a little bit: Would you rather choose a major that offers higher grades, or a major that offers higher earnings? Now, you may be a little less sure - is there actually a trade-off here?

It turns out that there may be. This 2016 article by Timothy Diette (Washington and Lee University) and Manu Raghav (DePauw University), published in the journal Education Economics (ungated earlier version here) suggests that there is. They used data from students enrolled at a single liberal arts college over the period from 1996 to 2008 (over 120,000 student-course observations), and looked at how students' grades differed by the median mid-career salary of the academic discipline of the course. They also controlled for student demographics, ability (SAT scores), and course characteristics, and found:
...a negative and statistically significant coefficient estimate for the median salary variable. Thus, the results suggest that departments with higher mid-career median salaries on average give lower grades after controlling for observable student characteristics and faculty fixed effects. The coefficient estimate of −0.002 suggests that moving from the lowest to highest paying major, an increase in salary of 46,600 dollars lowers a student’s grade by approximately 0.09 grade points or 12.2% of a standard deviation in grade points, a very small change for a three standard deviation change in median salary.
In other words, there does appear to be a trade-off between grades and earnings, albeit a small one. Students studying in majors that lead to higher later earnings can expect slightly lower grades. The effects were not the same for all students though:
...female students, who far outperform their male counterparts on average, lose some of their advantage in courses associated with higher [mid-career salaries]... those with relatively low SAT math scores are much more likely to get lower grades in courses offered by departments that have higher mid-career salaries.
In other words, the grade penalty for studying in a department leading to a higher mid-career salary is larger for female students, and for students with less mathematical ability. The effect on female students is interesting, and I wonder the extent to which it reflects the robust gender gap in earnings (which I have written about before). This would definitely be interesting to follow up on, because it holds even though student ability is controlled for (which suggests that it isn't necessarily the result of better female students sorting out of majors where grades are lower on average). On the other hand, the effect on less able students is pretty intuitive - it suggests they struggle more in subjects that lead to higher mid-career earnings.

Overall, these results have interesting implications for students. First, if you are using grades as a signal as to what you should major in, look at your grades relative to the rest of your class, not your grade relative to the other classes you are taking. If you are getting an A- in a class where the average is a B-, then that may suggest you are better in that major than you would in a class where you are getting an A but the class average is A-. Second, remember that grades are not the only signal to future employers about your ability. Employers do know the difference between an 'easy' major and a 'hard' major, which is a point I have made before.

The unfortunate thing about this analysis is that it doesn't answer the key question though - would a student be better off changing their major. This applies to students doing well in an 'easy' major (would they be better off changing to a 'harder' major) and to students doing poorly in a 'harder' major (would they be better off changing to an 'easier' major). I guess we will have to wait for an answer to those questions.

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