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This chapter is from the book

How Investing in Human Capital Pays

One of the common questions I get from eager young students who drop by my office is what they should major in or study at school. Some pose this as an existential, big-picture question: "What should I do with my life?" Others phrase it as a more targeted question: "I want to work in the investment industry. So, am I better off taking advanced managerial accounting or advanced derivative pricing?"

Despite what I've already said about varying pay scales by profession, and keeping in mind I am most definitely not a guidance counselor, my answer is usually as follows: First, figure out what you truly enjoy doing. A good way to do this is by taking as many different courses as possible. Then, when you find what you like, find out how to make money doing that. Although the answer might not satisfy them, this little piece of advice was given to me by my father many years ago, and it has worked out well for me personally. Although I've just spent the last few pages talking about the financial impacts of education decisions, the bottom line, for me, is that human capital estimates should form only part of your decision about what career to pursue. (However, I do think they should form at least part of your deliberations.) Somebody who truly wants to be a hairstylist but who decides to pursue a career as an optometrist because it pays three times as much will likely have a higher human capital value than they otherwise would—but they are also much more likely to be miserable!

I'm sure these remarks will sound odd if you worry about your kids who just love playing video games...or sleeping all day. Surely figuring out what you enjoy is not the best strategy for increasing the value of human capital, is it? Shouldn't professors be telling students to "aim high" and go to medical school or become engineers or lawyers?

Oddly enough, additional research—beyond what I've already reported—provides some subtle reasons for the discrepancy between the net worth of people with and without higher education. That is, the gap in net worth between people with a college degree and those with a high school diploma or less is attributable to more than just educational achievement. How so? Let's explore this question next.

First, let's start by examining actual household balance sheet values as estimated and reported by the U.S. Federal Reserve, as opposed to the theoretical estimates I have been giving for human capital (see Table 1.1).

Table 1.1. Does Education Pay Dividends?: Federal Reserve Board Survey of Consumer Finances 2007

Education Level (Head of Household)

Percent of U.S. Population in Group

Average Pretax Household Income

Average Household Net Worth

Median Household Net Worth

No High School Diploma





High School Diploma





Some College





College Degree





Here are some basic facts. According to 2007 data collected by the U.S. Federal Reserve in its Survey of Consumer Finances,7 the average net worth of U.S. college graduates is much larger than the net worth of individuals who don't have a high school diploma, or who didn't attend college. For example, in the year 2007, the average net worth of a family in which the head of the household has a high-school diploma only—and did not go on to college—was $251,600, whereas the average net worth for a college graduate was almost four times greater at roughly one million dollars. For those without a high school diploma, the average net worth was a mere $142,900.8 (Note that all these numbers use the conventional accounting measures of net worth—namely explicit financial assets minus explicit financial liabilities—and don't take into account the human capital value I previously discussed.)

Human Capital Investments over Time

No matter how you report the statistics, one thing is quite clear from the data: A college education—which is an investment in human capital—is statistically associated with greater net worth and greater income. As you can see from Table 1.1, the household headed by a college graduate had an average income of $143,800 in the year 2007 versus $51,100 for those who completed high school—and just $31,300 for those without a high school diploma.9 (One of the first economists to demonstrate this was Columbia University professor Jacob Mincer in his 1974 book Schooling, Experience and Earnings.)

As you might suspect, these multiples were not just limited to the year 2007. The gap is consistent across time. Eighteen years earlier, in 1989, the average net worth of college graduates was $672,400 whereas the equivalent number for high school graduates was $200,900. Notice that over that 18-year period the average net worth of college graduates increased by almost 63 percent—from a value of $672,400 to $1,097,800—whereas the average net worth of high school graduates increased by only 25 percent. (These amounts are all given in 2007 dollars, which means they are already inflation-adjusted. That is, the gap is not a function of inflation.) Indeed, this appears to provide yet more evidence of the long-term benefit that accrues from investing in human capital: Your net worth is both higher and increases faster. However, the reasons are more subtle than you think.

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