A higher minimum wage and the choice to study in higher education

We are back into teaching next week, and one of the first things we'll discuss in my ECONS101 class is the effect of opportunity costs and relative prices on decision-making. The opportunity cost of something is what you give up in order to get it. The higher the opportunity cost of something, the less likely you are to get it. The relative price of something is its price (or cost to you), relative to the price (or cost to you of something else). When the relative price of something goes up, we tend to do less of it, and when the relative price goes down, we tend to do more of it. Notice the two concepts (opportunity cost and relative price) are somewhat similar.

On that note, this article from the New Zealand Herald a couple of weeks ago provides a good example of both relative prices and opportunity cost:

Higher minimum wages have made it less worthwhile to get an education, a new study says.

The Ministry of Education study shows that your future income will still be higher if you get a degree - but the relative advantage of a degree is shrinking.

This is partly because of educational inflation - a lot more people are getting degrees, so the relative advantage of getting one over someone else is reducing.

But it also reflects big increases in the minimum wage, which have lifted the incomes of people with no qualifications faster than average wages, so incomes have become more equal.

Higher education provides gains, in terms of higher lifetime earnings (which is a point that I'll be covering with my ECONS102 class later this trimester). However, when someone weighs up the costs and benefits of higher education, as noted above a relevant consideration is the opportunity cost of that education - the earnings that they would give up while they are studying. If the minimum wage increases, then for some students (those that would have otherwise been earning the minimum wage), the opportunity cost of higher education increases. That should lead fewer students to undertake higher education.

Another way of thinking about this is that when the minimum wage increases, the relative price of higher education (the price of higher education relative to the alternative of continuing earning without higher education) has increased. That means that higher education is now more expensive in relative terms, because some students have to give up more in order to obtain it. And that should lead fewer students to undertake higher education.

Of course, it is interesting timing to release a report that seems to suggest that fewer students the net returns to higher education have decreased, just when we are entering an historic recession. Many of the jobs that are being lost (particularly in tourism and hospitality, as I noted yesterday) are at the minimum wage level, and for those people suddenly unemployed, the opportunity cost of higher education is suddenly lower than before. As I noted in yesterday's post, that suggests that now is an excellent time to be investing in retraining, for individuals as well as for government.