How Risky Is the Choice of a University Major?

Kässi, Otto (2014): How Risky Is the Choice of a University Major?

Abstract

This paper estimates the monetary returns to different university majors and the risks related to them. The residuals from a Mincer-type income regression are decomposed into unobserved heterogeneity (known to the individual when making her education choice) and risk (unknown to the individual). The risk estimates are corrected for selection by applying the selection correction model of Lee (1983) and an instrument based on the local supply of education in different majors. The differences in risks between different majors are found to be mostly statistically insignificant but differences in returns to majors are larger and significant. Both, income uncertainty and mean returns are found to be larger for men than for women.

• Item Type: MPRA Paper
• Language: English
• Keywords: return to education; uncertainty; selection
• Subjects: J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials

References

Arcidiacono, Peter, Hotz, V. Joseph, & Kang, Songman. 2012. Modeling College Major Choices Using Elicited Measures of Expectations and Counterfactuals. Journal of Econometrics, 166(1), 3 – 16. Annals Issue on ”Identification and Decisions”, in Honor of Chuck Manski’s 60th Birthday.

Baker, Michael, & Solon, Gary. 2003. Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records. Journal of Labor Economics, 21(2), 267–288.

Beffy, Magali, Fougère, Denis, & Maurel, Arnaud. 2012. Choosing the Field of Study in Postsecondary Education: Do Expected Earnings Matter? The Review of Economics and Statistics, 94(1), 334–347.

Bourguignon, Francois, Fournier, Martin, & Gurgand, Marc. 2007. Selection bias corrections based on the multinomial logit model: monte carlo comparisons. Journal of Economic Surveys, 21(1), 174–205.

Card, David. 1993 (Oct.). Using Geographic Variation in College Proximity to Estimate the Return to Schooling. NBER Working Papers 4483. National Bureau of Economic Research, Inc.

Card, David. 2001. Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems. Econometrica, 69(5), pp. 1127–1160.

Charles, Kerwin Kofi, & Luoh, Ming-Ching. 2003. Gender Differences in Completed Schooling. The Review of Economics and Statistics, 85(3), 559–577.

Chen, Stacey H. 2008. Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity. The Review of Economics and Statistics, 90(2), 275–289.

Christiansen, Charlotte, Joensen, Juanna Schroter, & Nielsen, Helena Skyt. 2007. The Risk-return Trade-off in Human Capital Investment. Labour Economics, 14(6), 971–986.

Cunha, Flavio, Heckman, James, & Navarro, Salvador. 2005. Separating Uncertainty from Heterogeneity in Life Cycle Earnings. Oxford Economic Papers, 57(2), 191–261.

Diaz-Serrano, Luis, Hartog, Joop, & Nielsen, Helena Skyt. 2008. Compensating Wage Differentials for Schooling Risk in Denmark. Scandinavian Journal of Economics, 110(4), 711–731.

Golec, Joseph, & Tamarkin, Maurry. 1998. Bettors Love Skewness, Not Risk, at the Horse Track. Journal of Political Economy, 106(1), pp. 205–225.

Hartog, Joop, & Vijverberg, Wim P.M. 2007. On compensation for risk aversion and skewness affection in wages. Labour Economics, 14(6), 938– 956.

Heckman, James J. 1979. Sample Selection Bias as a Specification Error. Econometrica, 47(1), pp. 153–161.

Lee, Lung-Fei. 1983. Generalized Econometric Models with Selectivity. Econometrica, 51(2), pp. 507–512.

Lundberg, Shelly, & Rose, Elaina. 2000. Parenthood and the earnings of married men and women. Labour Economics, 7(6), 689 – 710.

Mazza, Jacopo. 2012. Does Risk Matter? A Semi-parametric Model for Educational Choices in the Presence of Uncertainty. Tech. rept.

Montmarquette, Claude, Cannings, Kathy, & Mahseredjian, Sophie. 2002. How do young people choose college majors? Economics of Education Review, 21(6), 543 – 556.

Napari, Sami. 2008. Essays on the Gender Wage G sap in Finland. Research Institute of the Finnish Economy.

Palacios-Huerta, Ignacio. 2003. An Empirical Analysis of the Risk Properties of Human Capital Returns. American Economic Review, 93(3), 948–964.

Reyes, Loreto, Rodríguez, Jorge, & Urzúa, Sergio S. 2013 (Feb.). Heterogeneous Economic Returns to Postsecondary Degrees: Evidence from Chile. NBER Working Papers 18817. National Bureau of Economic Research, Inc.

Willis, Robert J, & Rosen, Sherwin. 1979. Education and Self-Selection. Journal of Political Economy, 87(5), S7–36.