Article

March 2014

Investment in higher education by race and ethnicity

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At an individual and family level, various factors influence the level of education investment. These factors include the family socioeconomic status (such as the amount of disposable family income and the education level of the parents), the ability of the child to complete his or her education, and the perceived economic and social benefits. The weight given to investing in education is therefore related to not only the stream of economic benefits but also the underlying characteristics of the family that chooses to invest.

Drawing on evidence from the Bureau of Labor Statistics’ Consumer Expenditure Survey (CE) microdata, a household survey that provides information on the buying habits of American consumers, this study extends previous research on human capital and investment in education by examining differences in educational expenditure patterns between race and ethnicity. We disaggregate the investment decision into two separate stages and explore any differences at each stage. First is the decision to attend college. Second is the level of expenditures for education. An individual who decides to attend college may incur different costs, depending on the choice of an educational institution and family background. Studying the amount an individual spends, given his or her decision to attend college, may provide further insights into differences in the educational investment decision.

In this article, parent’s education level refers to the education level of the reference parent. With the release of 2012 CE data, education of reference person was replaced by highest education level of any member in the consumer unit. This newly defined education classification, although not used in the analysis herein, does not change any statistical significance of the results presented in this article.

Consequently, this article evaluates whether race and ethnicity contribute to differences in investments in higher education. An investment decision includes both the decision to attend college and the amount of money invested given that decision. Many studies stop at examining differences in the likelihood to attend college by race and ethnicity, yet many differences in investment may be uncovered in the level of expenditures decided on for higher education. In this article, we first review the discussion of returns to schooling and the decision to attend college. Next, we describe the dataset we use for analyses. Finally, we discuss in depth the pieces that make up the differences in an investment decision by examining the decision to attend college by race and ethnicity and then focusing on levels of expenditures differences for higher education.

Returns to schooling and the decision to attend college: a literature review

Returns to schooling. The essence of human capital theory is that investments in human capital—schooling and training—raise a person’s income by increasing the individual’s productivity and in satisfying society’s demand for more highly remunerated skills. In the case of schooling, individuals forgo money they would have earned during their working years and instead incur direct educational costs to invest in their own human capital. The individual’s rate of return is based on the investment value of the gain in lifetime earnings.6

Notes

6Societies invest in human capital in the form of educational facilities, programs, and subsidies. The social rate of return is based on the benefits to society of having a more highly educated workforce, less the cost of providing the educational services required to achieve those benefits. In evaluating the rate of return to schooling, human capital theory factors in the effects of cognitive ability and technological change on individual human capital and economic growth. Briefly, the reasoning is that the cognitive ability of the individual contributes to the returns to schooling because those with higher cognitive abilities select schooling over paid work, and therefore, the observed returns actually relate to the individual’s innate abilities rather than the level of schooling. The difficulty in distinguishing the contribution of ability from that of schooling has led some economists to conclude that “education and cognitive ability are so strongly associated that the wage effects of the two cannot be separated for all groups . . . . The real problem is that ability and schooling appear to be inseparable—all interaction and not main effects—even if ability is perfectly observed.” See James Heckman and Edward Vytlacil, “Identifying the role of cognitive ability in explaining the level of and change in the return to schooling,” Working Paper 7820 (Cambridge, MA: National Bureau of Economic Research, August 2000), p. 18. Other researchers have also evaluated the effects of “signaling” ability on rates of return to schooling. The idea is that, in the absence of another tangible measure of ability, achievements in higher education allow employers to sort prospective employees on the basis of the presumed “signal” that the individual has enhanced productivity. A National Bureau of Economic Research study concluded that although high school graduates returns to ability are negligible, college graduation “plays more than just a signaling role in the determination of wages. . . . Graduation from colleges allows individuals to directly reveal their ability to potential employers.” In other words, differences in ability do not lead to significant wage differences for high school graduates without experience but are more tangible among college graduates and are reflected in differences in wages. Moreover, among college graduates, no estimated differences exist in wages or returns to ability by race. For more information, see Peter Arcidiacono, Patrick Bayer, and Aurel Hizmo, “Beyond signaling and human capital: education and revelation of ability,” Working Paper 13951 (Cambridge, MA: National Bureau of Economic Research, April 2008).

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About the Author

Tian Luo
luo.tian@bls.gov

Tian Luo is an economist in the San Francisco regional office, U.S. Bureau of Labor Statistics.

Richard J. Holden
holden.richard@bls.gov

Richard J. Holden is the Regional Commissioner of the San Francisco regional office, U.S. Bureau of Labor Statistics.