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Study: Majoring In Economics Raises Earnings By $22,000

Wednesday, October 21, 2020 - 12:32

By now, it’s a well-known fact that your salary after graduating college depends greatly on your major. An economics major will earn a median salary of $50,000 in the early stages of her career, while a psychology major will earn just $30,000. Indeed, a student’s major seems to make a bigger difference to her future earnings prospects than where she attends college.

But why do earnings differ by college major? It’s possible that choosing a certain major unlocks better job opportunities. Alternatively, perhaps people who select lucrative majors such as economics and engineering simply have more innate earnings potential. If the former answer is correct, then students can vastly increase their earnings power simply by switching majors.

A new study from economists Zachary Bleemer and Aashish Mehta provides compelling evidence that the choice of major matters, not inherent ability. Bleemer and Mehta study a sample of social-science students at the University of California-Santa Cruz (UCSC). The school’s economics department only allows students to major in economics if they earn an average 2.8 GPA in the two introductory economics courses. Would-be economists who fail to make the GPA cutoff must choose another major instead.

This policy provides the researchers with a unique study opportunity. Students with a GPA of 2.79 are quite similar to students with a GPA of 2.81. The only difference is that students with the slightly higher GPA are able to major in economics, while those with slightly lower marks must turn to other majors, such as psychology and sociology. By comparing the outcomes of students just above and below the cutoff, the researchers can isolate the impact of majoring in economics on future earnings.

They find that majoring in economics causes students’ earnings during their mid-twenties to rise by $22,000 per year, or 46%. The results show that simply choosing the economics major over alternatives in the social sciences is one of the best investments a person can ever make. The $22,000 earnings bump is comparable to the raw gap between economics majors’ earnings and those of other social-science majors, suggesting these differences are almost entirely due to students’ choices, not inherent differences in earnings potential.

The authors figure that majoring in economics unlocks access to jobs in high-paying industries, such as finance, insurance, and accounting. It’s unclear whether this is because economics classes teach skills that employers in these industries consider useful, or whether employers simply value the economics major as a signal of the student’s competence and ability. For students at least, the question is academic, because majoring in economics will secure them higher earnings either way.

The study has limitations. It only analyzes the economics major, so the findings may not be applicable to other high-earning majors such as engineering and nursing. Moreover, UCSC’s proximity to wealthy Silicon Valley may unlock job opportunities for economics graduates that are not available to students at most other universities. Nevertheless, the evidence is strong that choosing a major is a critically important financial decision for students.

That decision is becoming ever more important as new evidence emerges that a significant minority of college degrees do not justify the cost. Some programs even leave graduates with a student debt burden higher than their annual earnings. While college is a good investment on average, that average belies substantial differences in earnings potential across programs. Low-value college majors undermine the promise of higher education as a pathway into the middle class.

The good news is that students seem to have control over their future earnings potential and can influence their career outcomes with the choices they make in college. Our task is to ensure that relevant information on earnings differences across majors gets into their hands. Hopefully, the Bleemer-Mehta study will beget more research on the financial returns to choice of major.

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Preston Cooper
Preston Cooper
Link to Article
https://www.forbes.com/sites/prestoncooper2/2020/10/20/study-majoring-in-economi…
Tags:
Economics
Careers
October 2020