In the labour market, wages are highly sensitive to the employee’s majors. Ranking by lifetime salary, economics is usually among the best performance majors. From Doug Webb’s data, the median wage of forty-year-old U.S. workers with a bachelor’s degree in economics is $25,000 more than a same-aged worker with a bachelor’s degree in any other social science major in 2018. Economics even ranked as the top major for the top 1% income group people. Nevertheless, estimating the college major’s causal effect on earnings is challenging and suffers from the tricky self-selection problem. For example, suppose a common belief holds that majoring in economics promises a higher salary a priori. In that case, this belief will drive more talented students to choose economics. Normally, these gifted students are more capable of learning new knowledge and have higher chances of securing a higher-paid job no matter which majors they choose. Consequently, the belief in higher earnings on economics will be falsely realized and possibly reinforced further.
In the recent study by Bleemer and Mehta (2021), they overcame this challenge by a regression discontinuity design where they exploited a grade point average (GPA) restriction policy imposed by the Department of Economics at the University of California, Santa Cruz (UCSC Economics). In 2008, UCSC Economics introduced a threshold policy to prevent students from declaring an economics major: Unless obtaining special approval from the department, students must gain a GPA greater or equal to 2.8 on Economics 1 and Economics 2 to be qualified for declaring an economics major. Presumably, a student who has a 1.5 GPA is much different than the one who has 3.5. In contrast, we can hardly see any difference in learning ability between a student who has 2.79 and another who has 2.8. However, under the policy imposed by UCSC Economics, 2.79 is below the threshold, and thus that student is unable to declare an economics major unless, very rarely, acquiring a special approval from the department. This unique feature of the restriction policy provides an excellent identification by allowing researchers to bypass the inherent heterogeneity between two students and compare the difference in earning wholly and purely from the majors’ distinction.
Figure 1 shows the effect of the UCSC Economics threshold on majoring in economics. Students who are barely above the threshold are 36% more likely to declare the economics major than those who fail to meet the criterion. Next, given the above observation, Bleemer and Mehta (2021) estimate the effect of the imposed threshold on early career earning and find students who are barely above the threshold could earn $22000 more if they declare majoring in economics than those who are just below the threshold, an increase from $37000 to $59000. Figure 2 presents this astonishing disparity. The authors also show this wage gap is significant across the whole lifetime and robust against gender and racial differences.
Figure 1. Effect of the UCSC Economics threshold on majoring in economics.
Source: Bleemer and Mehta (2021)
So naturally, one may ask why economics major earn higher salaries. Bleemer and Mehta (2021) first examine the effect of the major access on education and attainment to address this question. The results show that accessing an economics major does not significantly change the likelihood of completing the degree and pursuing a graduate study — panels (a) and (b) in Figure 3 highlights these findings. They then focus on the course structure. In USCS, excluding economics 1 and 2, students majoring in economics need to complete 13 more economics courses than non-economics major students.
Figure 2. Effect of the UCSC Economics threshold on annual wages
Source: Bleemer and Mehta (2021)
Among these courses, 7 are traditional economics courses, and the rest are related to business, finance, and accounting. In addition, students majoring in economics are required to take two more courses specializing in quantitative methods. Bleemer and Mehta (2021) emphasize that this balanced course structure in economics major – more quantitative than other social sciences and more practical than sciences – may work as a high signal value of economics degree relative to other majors.
Figure 3. Effect of economics major access on education and attainment
Source: Bleemer and Mehta (2021)
Bleemer and Mehta (2021) further consider the course effects on student’s preference for the industry. They conjecture that the more economics courses students take, the more likely students increase their preference for economics-related jobs. They turned to investigate the employment by industry. Indeed, they find majoring in economics promotes students to choose finance, insurance, and real estate (FIRE) as their early career and demotivates students to opt for less-paid sectors like the education, healthcare, and social assistance industries. Figure 4 shows how wages depend on average GPA in different industries and presents the effect of the economics major access on industry preference. After rigorous estimation, Bleemer and Mehta (2021) find $10000 of the wage gap in an early career can be explained through the industry preference channel.
Figure 4. Effect of economics major access on industry preferences and employment
Source: Bleemer and Mehta (2021)
Of course, this research has some limitations. For example, suppose professors know this policy well and use the score to reflect their judges on students’ ability. In that case, professors may give the green light to those who did poorly in the exam but deserve a second chance. This scoring distortion will dramatically expand the gap of competence between students who barely surpass 2.8 and those just below this threshold and blur the key to this study’s identification strategy. Also, nearly all (98%) of UCSC students are from California, a prosperous state in the U.S. We may expect the wealth siphon effect from Silicon Valley to play a critical role in changing students’ preferences instead of the course effects.
Nevertheless, Bleemer and Mehta (2021) addressed the endogenous issue plaguing all previously similar studies rigorously and provided some convincing evidence explaining college major-related wage premium. Indeed, majoring in economics could make you richer. Yet, keep in mind this is only an average result. Certainly, it is not doomed to be poor if you choose a non-economics major as well. After all, where there is a will, there is a way.
Chaoyi Chen
References:
Bleemer Z, Mehta A. (2021). Will studying economics make you rich? a regression discontinuity analysis of the returns to college major. American Economic Journal: Applied Economics, forthcoming.
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