Economics graduates do the best sums
By Ross Gittins
January 29, 2005
It's the time of year when lots of students are thinking about uni courses. If you're trying to decide between an economics and a business degree, think carefully.
Though the number of students doing economics at high school is now recovering, the number doing economics at uni began falling in the early 1990s and is still falling.
Some students have turned to law and legal studies, but mainly they've been switching to business studies. Nationwide, the number of students doing business degrees doubled over the 10 years to 2000.
Why the great switch from economics to business studies? Maybe because economics is considered to be harder than business studies - more theoretical and mathematical. That's certainly true. If you're intellectually weak or intellectually lazy, economics isn't for you.
But another, maybe more significant reason is the belief that business studies (and law, too, no doubt) has more of a career focus and leads to higher-paid jobs.
If you think that, you need to do some homework. Consider the findings of a study by three economics lecturers at the University of Canberra, Philip Lewis, Anne Daly and Don Fleming. It's published in the latest issue of the Economic Society's Economic Papers.
Looking at figures from the Graduate Careers Council we find that, while the unemployment rate for all new graduates fell markedly over the 10 years to 2002, it fell by more for economics graduates - from almost 10 per cent in 1992 to a little over 4 per cent in 2002.
And whereas the median starting salary for all graduates rose by less than 5 per cent in real terms over the five years to 2002, it rose by more than 13 per cent for economics graduates.
Of course, starting salaries are ... just the start. According to the 2001 census, the median income of all male workers with economics degrees was higher than that for all male graduates and - get this - $10,000 a year higher than for male business graduates.
Between the censuses of 1996 and 2001, the median salary of male workers with economics degrees rose in real terms by 24 per cent to more than $62,000.
Why do people do uni degrees? Well, because of their thirst for knowledge and love of learning (yeah, sure), because of their desire to acquire social status (now you're talking) but mainly, I suspect, because of their belief that attaining a degree will allow them to earn more over their lifetime than if they entered the world of work with just the HSC.
If that's what you think, it makes sense to view the acquisition of a degree as an investment. As with most investments, it involves big costs upfront, in return for a stream of (higher) income stretching over many years.
One of the costs is HECS - the higher education contribution scheme - which we'll assume is paid on completion of the course. Add, say, $2000 a year in other course costs.
But the biggest upfront cost is, of course, the income you forgo by going to uni rather than working. What do you get in return? An income that, year after year, is higher than you would have got had you spent a working life with only high-school qualifications.
In the estimates that follow, it's assumed a male graduate works until he's 65. (Why this emphasis on males? Because the work history of females is much more uncertain and thus harder to estimate.)
As with the evaluation of all investment projects, these costs and benefits have to be weighed against each other and their different timing taken in account. Do this and you can work out an annual "rate of return" on your investment in a degree.
According to the estimates of our researchers, the private rate of return on a degree rose steadily between 1986 and 2001. But it rose almost twice as much for economics degrees as it did for degrees in general.
For economics it's now 17.6 per cent a year, compared with an average of 15.9 per cent for most other degrees. And get this: the return on an economics degree is now way higher than on a business degree. Whereas both had the same return of 11.6 per cent in 1986, by 2001 return on business degrees had risen only to 13.4 per cent.
Now get this: while the return on law degrees rose by almost as much as that on economics degrees, the return on law was a little below the return on economics in 1986 and, at 16.4 per cent, was still a little below in 2001.
Find that surprising? The main explanation is likely to be that economics and business degrees take only three years, whereas law takes four. HECS is higher for law, too.
So far we've assumed that students don't have part-time jobs while at uni. But allowing for a part-time job pulling in $225 a week (15 hours at $15 an hour) greatly increases the rates of return - because it greatly reduces the cost of income forgone upfront.
The rate of return on an economics degree jumps to 25 per cent a year, but the order of returns stays much the same: it's still a fraction higher than for law and quite a bit higher than for business (21 per cent).
Now let's assume it takes the student an extra year to complete his degree. That causes the rate of return to fall by 3 or 4 percentage points a year, thus greatly reducing the monetary value of the degree.
Moral: put more effort into planning the subjects you pick and think twice before you do a double degree.
But no matter how you change the assumptions you get the same answer: the rate of return on a degree has risen a lot since 1986. But it's risen most for economics degrees, so that their return is now a lot higher than for business degrees and still a little higher than for law degrees.
What would explain these trends? The return on degrees generally has risen because technological change seems to have caused the demand for skilled labour to grow even faster than its increasing supply.
But the switch of students from economics to business in search of better-paid careers has had a perverse effect. The supply of business-degree labour has grown faster than the demand for it, causing its relative return to fall.
By contrast, the dearth in economics-degree labour compared with the growing demand for it has caused its relative return - its price - to rise.
If you had an economics degree you could have worked that out for yourself.
By Ross Gittins
January 29, 2005
It's the time of year when lots of students are thinking about uni courses. If you're trying to decide between an economics and a business degree, think carefully.
Though the number of students doing economics at high school is now recovering, the number doing economics at uni began falling in the early 1990s and is still falling.
Some students have turned to law and legal studies, but mainly they've been switching to business studies. Nationwide, the number of students doing business degrees doubled over the 10 years to 2000.
Why the great switch from economics to business studies? Maybe because economics is considered to be harder than business studies - more theoretical and mathematical. That's certainly true. If you're intellectually weak or intellectually lazy, economics isn't for you.
But another, maybe more significant reason is the belief that business studies (and law, too, no doubt) has more of a career focus and leads to higher-paid jobs.
If you think that, you need to do some homework. Consider the findings of a study by three economics lecturers at the University of Canberra, Philip Lewis, Anne Daly and Don Fleming. It's published in the latest issue of the Economic Society's Economic Papers.
Looking at figures from the Graduate Careers Council we find that, while the unemployment rate for all new graduates fell markedly over the 10 years to 2002, it fell by more for economics graduates - from almost 10 per cent in 1992 to a little over 4 per cent in 2002.
And whereas the median starting salary for all graduates rose by less than 5 per cent in real terms over the five years to 2002, it rose by more than 13 per cent for economics graduates.
Of course, starting salaries are ... just the start. According to the 2001 census, the median income of all male workers with economics degrees was higher than that for all male graduates and - get this - $10,000 a year higher than for male business graduates.
Between the censuses of 1996 and 2001, the median salary of male workers with economics degrees rose in real terms by 24 per cent to more than $62,000.
Why do people do uni degrees? Well, because of their thirst for knowledge and love of learning (yeah, sure), because of their desire to acquire social status (now you're talking) but mainly, I suspect, because of their belief that attaining a degree will allow them to earn more over their lifetime than if they entered the world of work with just the HSC.
If that's what you think, it makes sense to view the acquisition of a degree as an investment. As with most investments, it involves big costs upfront, in return for a stream of (higher) income stretching over many years.
One of the costs is HECS - the higher education contribution scheme - which we'll assume is paid on completion of the course. Add, say, $2000 a year in other course costs.
But the biggest upfront cost is, of course, the income you forgo by going to uni rather than working. What do you get in return? An income that, year after year, is higher than you would have got had you spent a working life with only high-school qualifications.
In the estimates that follow, it's assumed a male graduate works until he's 65. (Why this emphasis on males? Because the work history of females is much more uncertain and thus harder to estimate.)
As with the evaluation of all investment projects, these costs and benefits have to be weighed against each other and their different timing taken in account. Do this and you can work out an annual "rate of return" on your investment in a degree.
According to the estimates of our researchers, the private rate of return on a degree rose steadily between 1986 and 2001. But it rose almost twice as much for economics degrees as it did for degrees in general.
For economics it's now 17.6 per cent a year, compared with an average of 15.9 per cent for most other degrees. And get this: the return on an economics degree is now way higher than on a business degree. Whereas both had the same return of 11.6 per cent in 1986, by 2001 return on business degrees had risen only to 13.4 per cent.
Now get this: while the return on law degrees rose by almost as much as that on economics degrees, the return on law was a little below the return on economics in 1986 and, at 16.4 per cent, was still a little below in 2001.
Find that surprising? The main explanation is likely to be that economics and business degrees take only three years, whereas law takes four. HECS is higher for law, too.
So far we've assumed that students don't have part-time jobs while at uni. But allowing for a part-time job pulling in $225 a week (15 hours at $15 an hour) greatly increases the rates of return - because it greatly reduces the cost of income forgone upfront.
The rate of return on an economics degree jumps to 25 per cent a year, but the order of returns stays much the same: it's still a fraction higher than for law and quite a bit higher than for business (21 per cent).
Now let's assume it takes the student an extra year to complete his degree. That causes the rate of return to fall by 3 or 4 percentage points a year, thus greatly reducing the monetary value of the degree.
Moral: put more effort into planning the subjects you pick and think twice before you do a double degree.
But no matter how you change the assumptions you get the same answer: the rate of return on a degree has risen a lot since 1986. But it's risen most for economics degrees, so that their return is now a lot higher than for business degrees and still a little higher than for law degrees.
What would explain these trends? The return on degrees generally has risen because technological change seems to have caused the demand for skilled labour to grow even faster than its increasing supply.
But the switch of students from economics to business in search of better-paid careers has had a perverse effect. The supply of business-degree labour has grown faster than the demand for it, causing its relative return to fall.
By contrast, the dearth in economics-degree labour compared with the growing demand for it has caused its relative return - its price - to rise.
If you had an economics degree you could have worked that out for yourself.
Last edited:
