The Option Value of Human Capital: Higher Education and Wage Inequality

Sang Yoon (Tim) Lee, Yongseok Shin and Donghoon Lee
Authors registered in the RePEc Author Service: Sang Yoon (Tim) Lee

No 21724, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Going to college is a risky investment in human capital. However, we highlight two options inherently embedded in college education that mitigate this risk: (i) college students can quit without completing four-year degrees after learning about their post-graduation wages and (ii) college graduates can take jobs that do not require four-year degrees (i.e., underemployment). These options reduce the chances of falling in the lower end of the wage distribution as a college graduate, rendering standard mean-variance calculations misleading. We show that the interaction between these options and the rising wage dispersion, especially among college graduates, is key to understanding the muted response of college enrollment and graduation rates to the substantial increase in the college wage premium in the United States since 1980. Furthermore, we find that subsidies inducing marginal students to attend colleges will have a negligible net benefit: Such students are far more likely to drop out of college or become underemployed even with a four-year degree, implying only small wage gains from college education.

JEL-codes: E24 I24 J24 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-edu, nep-hrm, nep-lma and nep-mac
Note: ED EFG LS
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://www.nber.org/papers/w21724.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:21724

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w21724

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().