Citation

Discussion Paper Details

Please find the details for DP10416 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Risk and Returns to Education Over Time

Author(s): Jeffrey Brown, Chichun Fang and Francisco J Gomes

Publication Date: February 2015

Keyword(s): human capital, idiosyncratic earnings risk and life-cycle models

Programme Area(s): Financial Economics, Labour Economics and Public Economics

Abstract: We model education as an investment in human capital that, like other investments, is appropriately evaluated in a framework that accounts for risk as well as return. In contrast to dominant wage-premia approach to calculating the returns to education, but which implicitly ignores risk, we evaluate the returns by treating the value of human capital as the price of a non-tradable risky asset. We do so using a lifecycle framework that incorporates risk preferences and earnings risk, as well as a progressive income tax and social insurance system. Our baseline estimate is that a college degree provides a $440K dollar increase in annual certainty-equivalent consumption. Although significantly smaller than traditional estimates of the value of education, these returns are still large enough to offset both the direct and indirect cost of college education for a large range of plausible preference parameters. Importantly, however, we find that accounting for risk reverses the finding from the education wage-premia literature regarding the trends in the returns to education. In particular, we find that the risk-adjusted gains from college completion actually decreased rather than increased in the recent period. Overall, our results show the importance of earnings risks in assessing the value of education.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10416

Bibliographic Reference

Brown, J, Fang, C and Gomes, F. 2015. 'Risk and Returns to Education Over Time'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10416