When it Comes to Earnings Potential, Major Choice Plays a Key Role

If you’ve just packed one (or more!) kids off to college, you’re probably still reeling from the aftershock of writing that hefty tuition check.

And possibly wondering if the money’s really worth it.

The short answer: yes. Individuals who graduate with at least a four-year college degree earn on average 84% more than workers with a high school diploma. Taking it a step further, recent research by Jon James, an economist at the Federal Reserve Bank of Cleveland illustrates that a student’s choice of a major is a significant factor in determining her earning power after graduation.

Not surprisingly, his research also showed students with an advanced degree are even further ahead salary-wise once they enter the workforce.

The graph below tracks the so-called “college premium,” which compares average hourly wages for those with bachelor's degrees or higher to the income earned by those who dropped out of college. Both are compared to the average wage of individuals who only completed high school, which is represented on the horizontal line labeled “1.”

There few things to note: First, while the wage premium for a college degree has fluctuated over the past 30-plus years, it began a taking off in the mid-1980s. Second, attending college without graduating doesn’t do much good. Going back as far as the late 1970s, an individual who only took “some” college-level courses has earned just 20% more than a high school grad. In contrast, individuals with a B.A. or higher were earning at least 80% more than a high school graduate and 60% more than someone who didn’t complete college.

As James writes, “…over the last three decades, the value of college has increased substantially, with all of the gains going to those who actually complete [a four-year] degree.” In other words, the income premium goes to those who graduate.

Why is having a college degree so much more important to employers today? One reason might be the fact that the workplace uses much more technology today than 40 years ago. As James points out, “Highly-skilled workers are more valued in the workplace.” You’re more likely to have used or been exposed to technology if you’ve graduated from college, and in the eyes of an employer, that should make you a more productive worker.

While the economic value of having a college degree has been known for some time, James’ work takes the research two steps further--breaking down the numbers to examine how someone’s income potential is impacted by earning an advanced degree and major.

The chart below breaks out the earnings premium of those with a four-year undergraduate degree and those who went on to earn an advanced college or professional degree, such as Masters, PhD, M.D., etc. (Again, the horizontal line labeled “1” represents the average income of those with just a high school diploma.)

This clearly illustrates that for the past 10 years, the average income premium for those with “only” a bachelor’s degree has been relatively flat. The main reason the college earnings premium has increased since 2000 is due to the higher income earned by those who hold advanced degrees.

“Those with advanced degrees really pull away,” says James. “If technology is changing such that people are more productive with these higher degrees, the market’s going to reward them.”

Still, it’s important to note that not all advanced degrees are created equally. As James points out, someone with a PhD in English literature “is making about the same premium as an economics major with a bachelor’s degree.”

However, the biggest eye-opener in the report is how much a student’s major influences lifetime income.

The next graph compares average earnings- not only in terms of four-year degree vs. advanced degree- but also by one’s chosen field of study. The height of each bar indicates the percentage of students who went in to a particular major. Thus, “Business” is the most popular, followed by “Education.”

The width of the bars corresponds to the income premium. For example, individuals with a bachelor’s degree in “communications and journalism” earned, on average, one and a half times (1.5) more than the average wages paid to everyone with just a high school education. Earning a higher degree translated into an earnings premium of roughly 1.85 times more income. (Notice that this graph is turned 45-degrees from the previous ones. The average income of a high school graduate is still represented by “1,” except that this line runs vertically instead of horizontally.)

The surprise, says James, is that the choice of one’s major can make a bigger difference in your income than going to college. “There are larger gaps between the majors people choose once they’re in college than the gap between high school versus college graduates.”  For instance, on average, someone who gets a four-year degree in “engineering,” will earn nearly twice as much as the student who graduates with an undergraduate degree in “psychology and social work.”

So, should parents try to steer their children into more lucrative career paths? James, a father of two, doesn’t advocate that. He points out that a lot of factors go into the choice of a major and that “there’s only so much a parent can do.” In fact, it’s typical for a college student to change majors several times before graduating.

A major factor in whether a student is attracted to and sticks with a major is the amount of preparation a s/he gets in high school. “If you’re not sure what major you want to pursue,” says James (and what 17 year old is?), “You might be limiting yourself” if you don’t take more than the bare minimum requirement for high school math. Since most of the careers with the highest earnings premiums involve mathematics, a solid foundation in algebra and calculus is essential.

This suggests that one of the most important things parents can do is to encourage their children to take these courses before they head to college. If she hasn’t taken these courses, even a student who might want to pursue engineering would have a tough time doing so.

Still, at the end of the day, money isn’t everything. While it’s easy to quantify income, job satisfaction is tough to measure. Would you rather have your child earn a ton of money but hate going to work every day? In addition, there are factors such as job security, tenure, working conditions and benefits that should be in taken into account when making career decisions.

In the end, perhaps all parents can do is encourage their children to explore different subjects in college and let them know that, regardless what field they choose, you respect their decision and will do everything you possibly can to help them succeed.

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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