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This chapter is from the book

The Best-Paying Careers?

For many previous generations, and in the eyes of many economists until about a half-century ago, paying for higher education was not considered an investment but rather a consumption good such as an expensive suit, car, or set of golf clubs: It might make you feel better about yourself but didn't necessarily have an investment value. Today most people would agree that financial returns to education can be quite substantial. That is, money spent on college education is generally perceived much more like an investment that will pay dividends well into the future. According to estimates by the International Monetary Fund and the World Bank, the private return to education—what the individual college student can expect to gain—is between 20 percent and 30 percent and the social return—or what society gains from investments in post-secondary education—is from 10 percent to 20 percent.3 The lesson is clear: Investing in human capital pays dividends. But the question of how much is paid out depends significantly on your choices about post-secondary education. How so?

According to a May 2009 cover story in U.S. News and World Report, the median national pay for a hairstylist is $33,700 per year. In contrast, an optometrist earns a median $99,700, which is three times as much as the hairstylist.4 According to the story, the employment outlook for both professions is good, and despite the pay gap, both groups report high job satisfaction. Now, guess which one of these two professions requires more effort, education, and training? Yes, the optometrist. You can probably work as a successful hairstylist with barely a high school diploma (or less) and a short training period. In contrast, to become an optometrist requires an O.D. degree, which means, in turn, that you need to spend four years and beyond in college.

The gap between the expected incomes of a hairstylist and an optometrist, and between the years of study required for each profession, provides an important lesson in the economics of the development of human capital. Unlike most forms of financial capital, you can't actually inherit human capital, win it in the lottery, or stumble across it in an antique sale. Most people have to work hard and invest time and effort in nurturing their human capital. In general, the more you are willing to invest in human capital—in terms of time, money, and effort—the greater the financial payoff. More important, when you "mark-to-market" the holistic balance sheet of two 25-year-olds, one studying to be a hairstylist and the other an optometrist, the human capital value of the optometrist is more than three times as great as that of the hairstylist. I estimate that the optometrist's human capital is worth approximately $1.8 million whereas the hairstylist's is worth $0.6 million.5

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