Toward a new methodology for estimating the marginal social rate of return to public investments in higher education

Graduation date: 1985The United States invests tens of billions of dollars in higher\ud education each year. This had led many researchers to estimate the\ud marginal and average rates of return to these expenditures. Past\ud works, however, have been partial in scope. That is, they have\ud counted only the benefits of higher education which result from the\ud increased earnings of college graduates over people with only a high\ud school diploma. Additional benefits, such as lower consumer prices\ud which result from a more productive work force, have not been considered\ud previously and empirically estimated.\ud The purpose of the present study was to use the techniques of\ud applied welfare analysis to develop a new approach to estimating the\ud marginal social rate of return to investments in higher education.\ud The annual economic benefits to society from increased levels of\ud public support for higher education are estimated by changes in areas\ud of consumer and producer surplus associated with the general equilibrium\ud supply and demand curves for college educated labor. These\ud benefits are then equated with the increased expenditures using a\ud standard discount formula, and a marginal social rate of return is\ud calculated.\ud Data for this study come from the Bureau of the Census and the\ud National Center for Educational Statistics. The supply and demand\ud curves for the labor of college graduates are estimated by ordinary\ud least squares regression treating each state as a separate labor\ud market.\ud Our analysis suggests that further increases in the level of\ud public expenditures for higher education may not be justified using\ud cost benefit analysis techniques. The weakness of the statistical\ud properties associated with our empirical results, however, indicates\ud considerable additional research is necessary prior to making a\ud policy recommendation on the issue