Why do we study?
Mon 14 Apr 2014 by Mieke Welvaert in Labour marketSkills

Next month I’ll be graduating.  For those who graduate with me it will be a time for celebration, but also a time to see what our peers have done in the six short months since completing study. We’ll judge, we’ll compare and wonder what we would tell our ‘first-year’ self if we could.  Post-school education has become increasingly popular over the decades, but why do we do it?  Are we really investing in our future, or are we taking advantage of a subsidised consumption good? Although I am grateful for my tertiary education, my initial reasons for taking it on were significantly less thought-out than I had hoped.  So, as I’m about to wave my accidental, circumstantial and ‘I took this course because the lecturer played the ukulele’ degrees in the air, I am going to think through why anyone makes the decision to study.

Education as an investment good

In the past two decades, further (post-school) study has become increasingly popular.  Between 1993 and 2013, the proportion of the workforce with post-school qualifications rose from 47% to 59%.  As further education has become more accessible and as the demand for high-skilled workers has increased, society has begun to expect most school leavers to pursue further education.

In this environment, higher qualifications are increasingly relied upon as proof of ability (if not competence in the degree subject matter) in the job market. Although people can acquire knowledge and skills through self-teaching, qualifications provide a formal endorsement of skills learnt. Rising demand for qualifications as indicators of competence is purported to result in degree inflation where employers seek more qualifications from position applicants than a role requires. (This idea is also known as the graduatization of low skill-level positions).  Consequently, post-school education has become more of a requirement to get (better) jobs.  As a result, tertiary education is seen as an investment. Worryingly, I doubt that many new students ever crunch the numbers on one of their biggest life investments.  But why should they? They don’t have to think about paying back their loans for a number of years (depending on the length of the course), and because students loans are interest free, there’s little incentive to rush the process.  We are less concerned about the costs of a degree because we are psychologically distanced from the ‘future self’ that has to pay them.

Put another way, if a thug comes up to you and says “tomorrow, I’m going to punch you in the face”, you’d be worried, but if that same thug instead said, “In five years’ time, I’m going to punch you in the face” you’d probably laugh. As we find it difficult to empathise with our future self, we worry very little about the future costs of our education.

Education as an investment was the primary reason I took on a degree in the first place but, even though it is the largest investment I have made in my life, I was one of those students who never calculated whether it was financially worthwhile. 

So, with little recourse to change what’s done, I went on to the Careers NZ website to see what I’m likely to earn with my double degree in Economics, Geography and Finance.  When compared to not studying further after secondary school, my course of study breaks-even in roughly six years’ time.  Considering that, all things going to plan, I have another forty years of my working life ahead of me, I’m reassured that my investment is likely to pay itself off.

Subject choice and completion time are important factors when valuing one’s education investment.  Law graduates typically do not earn a strong hourly wage their first years out of study, lengthening the pay-off period.  Medical students earn the most following study out of all of CareersNZ’s categories and will see their study become profitable in six years after graduating (when compared to not studying further after secondary school).  At the other end of the spectrum, performing arts students have a lower median income than school leavers following graduation, indicating performing arts students receive negative returns on their education.

Education as a consumption good

Which brings me to my next point: If performing arts students exist, they could either be really bad investors, or education could be more than just an investment good.  Given that many gain satisfaction from study, education is also considered to be a consumption good. 

The crossover of how much a course of study is investment and how much is consumption, varies with the individual.  For performing arts students, further study in the field will mostly be a consumption good.  For others, a degree or diploma can be a recognition of knowledge, and while the student may have been able to acquire the knowledge for free, they are investing in the recognition that a degree certificate provides. For those in-between, paying for a degree is like paying for aerial yoga classes: no-one needs yards of fabric and an instructor to exercise (and invest in physical health) but, going to aerial yoga classes indicates a personal preference for receiving the benefits of exercise in the form of aerial yoga.  In choosing to pay for our further training we are signalling that education, as a combination of an investment good and a consumption good, is worthwhile.

Looking back, if I could talk to my ‘first-year’ self I would advise that education is a huge investment that should generate a sufficient return.  If this was not entirely the case, education is a consumption good that I better have liked more than the lavish around the world trip I could have gone on instead.


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