Return on investment high for economics graduates

April 4, 2021

Economics graduates get a high ROI on their degrees. (AP Photo/Carlos Rene Perez)

Students who majored in economics earn significantly higher annual early-career wages, according to a new study that is among the first to employ a quasi-experimental research design that identifies labor market returns as a result of college major choice in the U.S.

"There's a big dispersion of wages across college majors," Zachary Bleemer, co-author of the paper and a Ph.D. candidate in economics at the University of California, Berkeley, told The Academic Times.

"If you look at the average 40-year-old economics major working in the United States, they have earnings on the order of $90,000 a year as the median," he said. "And if you compare that to earnings in the other social sciences, you see median earnings around $65,000 a year. That gap is gigantic"

Bleemer and his co-author, interested in investigating this gap, wanted to know what could explain such a gap.

"Is it reflecting the kinds of students who study economics, people who have different preferences over jobs or have different preferences over wages?" Bleemer said. "In fact, it could have been something like only the kids of rich parents studied economics."

The researchers were able to employ a quasi-experimental research design to investigate this question by utilizing a policy that existed in the economics department at the University of California, Santa Cruz, between 2008 and 2012. Unlike a true experiment, a quasi-experiment does not randomly assign subjects to different groups; rather, subjects are assigned based on nonrandom criteria.

"Basically, the department of economics faced massive demand around the financial crisis [of 2008] for undergraduates who wanted to study economics," Bleemer said. "And the department felt like they had to make tough choices: Either they could allow their classes to grow pretty tremendously, or they had to somehow restrict who was allowed to be an economics major. They chose the restriction path, imposing this policy: If you had below 2.7 GPA in economics, you were not really allowed to be an economics major."

Bleemer added that a similar policy is in place at many other public universities.

The researchers thus had two groups of students to compare: students who had just above the 2.8 GPA threshold in economics, who were allowed to stay in the major, and students just below the 2.7 GPA threshold, who were forced to choose a different concentration. Their final sample yielded 3,000 students who took Economics 1 and 2, the introductory economics courses at UC Santa Cruz at the time, over a five-year period.

The researchers used two data sources to make the comparison in wages between the two groups of students, linking student transcript information from UC Santa Cruz to a wage database from the California Employment Development Department, which maintains the state's unemployment-insurance system and is able to provide data access to researchers.

"It turns out, if you follow these kids along, you see this very large wage difference between the two groups," Bleemer said. "Kids with 2.8 GPAs do a lot better in the labor market in terms of wages and a number of other indicators than the kids with 2.7 GPAs." 

The researchers found that students who were allowed to continue in the economics program at UC Santa Cruz earned $22,000 higher annual early-career wages — that is, wages in their mid-20s — compared with the students who had to pursue a different major because they fell below the 2.7 GPA threshold. In other words, students who continued in economics earned 46% more than those who had to pursue another major.

Based on their findings, the researchers ruled out some possible explanations for this wage difference: Becoming an economics major did not change educational outcomes, degree attainment at the undergraduate or graduate level, or difference in overall grades, which might have an effect on their wages in the labor market.

"The only real difference between these students is that one group of them got B-pluses in Econ 2, and the other group got B's in Econ 2," Bleemer said. "There's very little reason to think that those two groups have very different labor-market potentials. Once they leave Santa Cruz, after all, the only difference between them is this single grade."

He added, "It's also true that one group had a slightly higher GPA, but a slightly higher GPA isn't going to be able to explain an $8,000 or $10,000 difference in wages." 

Instead, the researchers found that access to the economics major shifted students' preferences toward business or finance careers. 

"It appears to change students' preference over their future work," Bleemer said. "Even if you survey them as sophomores or juniors before they've started looking for jobs after graduation, already they're reporting substantially greater interest in working in business and finance careers."

"Presumably part of that is because now they think they can get those jobs, but part of it is probably that they took a set of courses studying this kind of material and that kind of work," he said.

Bleemer explained that this gravitation toward careers in business and finance, at least from a financial perspective, "is a good move because those are very high paying jobs." Because of their interests, economics majors tend to work in higher-paying industries including finance, insurance, real estate and accounting. 

"Just on the basis of that industry selection, we can explain about half of the economics wage," Bleemer said. "In other words, about half of the reason economics majors earned more than noneconomics majors is that they're working in higher-paying industries, and the other half is that they're earning more in those same industries that the noneconomics majors are working."

Bleemer suggested that there are two major implications and broader insights to be gleaned from this research.

For undergraduate students choosing between majors, Bleemer emphasized that this paper shows that choosing a major has serious long-run ramifications for students' employment. "Economics may open a lot of doors that other majors have a hard time opening," Bleemer said.

The second key takeaway from this study is about this kind of GPA restriction policy that exists across U.S. public universities.

"The Santa Cruz economics department booted a lot of low-GPA students out of its major," Bleemer said. "They might have done so because they thought it was in the student's best interest because, after all, these were kids who couldn't get good grades in introductory economics courses."

"But this paper suggests otherwise," he said. "The economics department really harmed these below-threshold students in terms of their long-run employment outcomes. And I think it's really worth reconsidering these kinds of departmental policies that restrict access to low-GPA students exactly because the long-run ramifications for the booted-out students are substantial."

The study "Will Studying Economics Make You Rich? A Regression Discontinuity Analysis of the Returns to College Major," forthcoming in American Economic Journal: Applied Economics, was co-authored by Zachary Bleemer, University of California, Berkeley; and Aashish Mehta, University of California, Santa Barbara.

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