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Minor Initial Differences Magnify over Time

As you can see, even a small difference in annual wage income can lead to enormous differences in the holistic balance sheet over time. This point was emphasized in a study of college majors discussed in a recent issue of Forbes magazine.6 According to data from the website PayScale.com and published in Forbes, a college graduate who majored in English and had less than five years of experience earned a median wage slightly less than $40,000 in 2008. An English major with 10 years to 20 years of experience earned approximately $60,000 per year. Thus, roughly speaking, the premium for experience was $20,000 per year.

In contrast, according to the same survey, a mechanical engineering college grad with less than five years of experience earned a median $60,000 in 2008, which is approximately $20,000 more per year than the English major. Furthermore, the mechanical engineer with 10 years to 20 years of experience earned a median $90,000 in wages. The experience premium in this case is $30,000 per year.

Thus, I would argue that the human capital of a mechanical engineer who is just about to graduate is (much) more valuable than the human capital of an English major for two reasons: First, the engineer's initial wage out of college is greater than the English major's, and secondly, the premium she will be paid for the experience she builds over time is higher as well. Thus, the present value of the after-tax wages for the two graduates over the estimated 40 years of income is greater. For the English major I estimate it is $1 million and for the mechanical engineer it is $1.5 million. (Now, wouldn't it be useful to know this as you contemplate college majors?) Stay tuned for more insights into how education decisions affect wealth-building over time.

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