In Earnings of economics majors: general considerations I presented data showing that economics majors make substantially more money (20%-50%+) than majors in other liberal arts. I gave five hypotheses, each of which could partially account for the wage gap. These are possible differences between the majors in:

1. Human capital acquisition.
2. Acquisition of a desire to make money.
3. Pre-existing ability as measured by tests.
4. Pre-existing desire to make money.
5. Signaling.

I discussed a priori reasons for believing that they might be significant, and how one might go about testing the hypotheses and the extent to which they explain the wage gap.

Having examined available data, I believe that with the possible exception of #3, based on publicly available information, there’s a huge amount of uncertainty as to the roles of these factors in explaining the wage gap. In many cases there is data suggesting the presence of effects, but the data is not robust and the sizes of the effects are entirely unclear. Furthermore, the hypotheses are not exhaustive: other factors (such as those mentioned at the very end of this post) plausibly play a role, making it difficult to reason in the fashion “factors A, B and C play very small roles, therefore factor D must play a large role.”

I was originally hoping that there would be a simple, clearcut case for or against majoring in economics increasing earnings (relative to other liberal arts), but resolving the question would seem to be a major research project. Still, I hope that this post can help students who are contemplating majoring in economics or another liberal art get a feel for the “lay of the land,” and some of the points therein may be actionable for particular individuals.

I’ll address each hypothesis in turn.

This post is very long. If you’re short on time or attention, consider scanning over the subtopic headings and reading the sections that look most interesting. As usual, I’d appreciate any relevant thoughts, particularly if you’re a former economics major.

#1 Human capital acquisition

• I was unable to find systematic research on the role of human capital acquisition in economics majors’ greater earning power, and the available data is not robust.
• There are major biases that make it difficult to infer the role of human capital acquisition in economics majors’ higher earning power from what people say.
• It seems relatively uncommon for people to argue that object level knowledge of economics is useful on the job.
• Many sources argue that economics majors indirectly learn skills such as analytical thinking and quantitative literacy that help on the job.
• There may be considerable heterogeneity with respect to how useful particular courses for the economics major are, and how useful they are for a given career, across courses and careers. Estimating the magnitude of human capital acquisition from majoring in economics would require (i) subject matter knowledge of the individual courses (ii) knowledge of how common it is for an economics major to take each of these courses and (iii) how former economics majors are distributed across jobs.

Biases affecting reports of the usefulness of economics on the job

People’s opinions vary concerning how useful knowledge of economics is on the job. It’s difficult to assess the veracity of their views:

• Representatives of economics departments are motivated to portray economics as more useful than it is.
• When people make a decision, they often want to believe that they made the right decision, and will come up with rationalizations for why their decisions were right. Psychologist Robert Cialdini’s discusses this in his book Influence: The Psychology of Persuasion. Thus, former economics majors may be motivated to believe that what they learned in majoring in economics is useful on the job, and so exaggerate the usefulness of majoring in economics. In the other direction, those who didn’t major in economics may be motivated to believe that economics doesn’t teach employable skills.
• People who major in economics may unknowingly pick up analytical / critical thinking skills that are superficially unrelated to their coursework, that prove useful on the job.
• Those who major in economics often don’t have knowledge of what skills they would have picked up on had they majored in a different subject, and so may not be able to make a good comparison.
• Some of those who express views on the subject may not know much about economics coursework. For example, employers who don’t know economics may notice that economics majors are better employees and misattribute this to what they learned in their economics classes, when it’s actually due to other factors.
• It’s unclear how representative those who speak up on the subject are: people who have found economics useful on the job may be more or less likely to report on this than those who don’t.

Quotations from current economics majors

Some quotations from a message board thread on College Confidential. Note that at least two of the commenters hadn’t yet graduated from college at the time when they wrote.

From VMadden

Econ teaches you a lot of math which is very useful for careers in finance or accounting. The problem is that most of the later econ courses are highly theoretical and, therefore, not very appropriate to real life.

From onhcetum

It’s a bunch of theoretical ********. I am about four classes away from graduating, and I still haven’t learned crap. I know the basics of supply and demand and the relationship between the unemployment rate and inflation and GDP, but not a whole else.

From econoboy

Economics is an interesting field of study (like most social sciences) but it’s also (like most social sciences) not marketable and very academic in nature. Economics makes many simplifying assumptions about human behavior that in reality makes it very unrealistic. I’m getting ready to graduate college feeling like I have learned a lot and had a good well-rounded education but I’m also sitting here thinking to myself – “What am I going to do for a career?” I just put in 4 years of school and I honestly don’t feel much more marketable than a high school graduate.

Quotations from former economics majors

I had difficulty finding relevant quotations from former economics majors, who are the ones who would be best equipped to make an assessment.

Found on the thread Why you should major in Economics at College Confidential:

”Pooja Jotwani, a recent graduate of Georgetown University in Washington D.C., […] says the major strengthened her business skills and provided her with something very simple: “financial security.””

[…]

”I work at the corporate headquarters of Mervyn’s as a financial analyst and internal auditor. None of my work relates to the material I studied as an undergrad, but that does not imply that my economics degree provides little value. As I have found from my own recruiting experience, an economics degree enjoys a great deal of respect because of exposure to issues related to the economy and thus business, as well as the analytical thinking that underlies economics.”

[…]

”I am now in Law School at Harvard. Nowadays, an Economics degree is one of the most helpful degrees to have for an entering law student. In my experience, it is the only academic non-legal subject that every substantive introductory law class teaches; every class thereafter assumes one has an understanding of economics.

[…]

Well considering that I’m currently a Marketing intern for a video game company… and am working on marketing campaigns for a THQ game and several MMOs, I would say the Econ major on my resume didn’t hold me back from it. Also, the other marketing intern here is an Econ major from another school. Not going to say it helps for marketing, but it doesn’t hurt.”

Quotations from college economics departments

A few representative statements below. These sources are obviously biased.

University of Houston

Your economics training provides you with a terrific set of job skills, and in fact the economics major provides you with virtually all of the top ten most important job skills […] the graphs in economics represent quantitative concepts, and as an economics major you will certainly have no fear of graphs. Further, many classes use explicit numerical problem solving. You also have the opportunity to explicitly learn a wide range of statistical and computing tools […] There is no better major for learning analytical problem solving than economics. […] All of business is problem solving, and this is the expertise you have learned from the logical constructs in economics

George Mason University

When you graduate with an economics degree, you will have a good understanding of the national economy and will be able to think critically about problems in the business world. You will also have good communication skills and skills in manipulating data and using computer technology. Thus you will be prepared for many careers. […] Economics majors compete very well against most business majors for jobs in the business world. Many large corporations value the broad analytical training received by economics majors.

Smith College

Individuals with training in economics are well prepared for a variety of careers. In most cases, the rigor and precision of technical training in economics will give the graduate a competitive advantage.

Quotations from economists

As I mentioned in my original post, economist Bryan Caplan wrote:

In my experience, undergraduate econ majors learn only two skills they’re likely to use in any job outside the Ivory Tower: (a) how to calculate a present discounted value, and (b) basic statistics. Except in top schools, I doubt most econ majors master either (a) or (b). The remainder of the economics curriculum simply isn’t vocational.

Economist Greg Mankiw seems to think that majoring in economics increases earnings based on his blog post Why Major in Economics?. He doesn’t give a causal pathway, but could think that a causal pathway is human capital acquisition (or signaling).

What employers say

Surveys of employers are focused around how desirable they find economics majors, and most of the ones that I’ve found don’t separate out the extent to which economics majors are considered desirable because of what they learn in their economics major. But to the extent that employers want economics majors, it may be because of human capital acquisition, so employers wanting economics majors is evidence that employers think that economics majors acquire more human capital than usual, which is in turn (inconclusive) evidence that economics majors do in fact acquire more human capital than usual. For information on how desirable employers find economics majors, see the section of this post labelled “#5 Signaling”.

The report Economics Graduates’ Skills and Employability has some information on how employers who are hiring students for roles that utilize economics specifically feel about how well prepared their starting employees are.

The starting salary vs. midcareer salary test

In my earlier post, I suggested that by comparing the percent by which starting salary grows over the course of a career for economics majors vs. other majors, one can obtain evidence for or against majoring in economics increasing human capital (relative to other majors). Specifically, I said that an increase in human capital should become less significant in relative terms over time (e.g. because the amount of human capital that one gains on the job over a course of a career should dominate what one gains in college), so that if majoring in economics increased human capital, one would expect the percentage growth for economics majors to be lower than those of other majors.

Payscale’s 2008 report gives the percentage increase from starting salary to midcareer salary by major:

By the logic of my earlier post, the fact that the figure for economics is higher than that of most liberal arts would seem to be evidence that economics builds less human capital than the other majors do.

There’s a confounding factor: economics majors have higher starting salaries, and in general, outside of technical professions such as engineering, people with higher starting salaries may experience higher percentage growth. (For an example supporting this intuition, my impression is that there are elite finance firms where earnings go up by 300% over the course of their careers, even after taking into account people being laid off.)

To try to control for this factor, one could compare percentage growth by major with percentage growth figures for alumni of colleges with the same average starting salary as the major. The percentage growths for colleges with a fixed starting salary are highly variable, so employing this strategy would require detailed analysis. A cursory look at the data hints to me that the general effect of higher starting salary on percent increase of earnings is not high enough to fully account for economics majors having such a high percent increase relative to other majors. But since I haven’t done a systematic analysis, I have low confidence in this.

So the fact that economics majors’ salaries increase by a much larger percentage than the other majors aside from philosophy would seem (very tentatively) to be evidence against the hypothesis that economics majors make more money because majoring in economics builds human capital.

#2 Acquisition of a desire to make money

Here too, there’s little data available.

Increased selfishness?

There are a number of psychology studies (see e.g. Does Studying Economics Breed Greed? and Are economists selfish? A lit review) that purport to associate studying economics with greed but:

• In some cases there are explanations other than greed that could explain a difference between the populations. For example, one study finds that economists give less money to charity than other academics do, but this could reflect economists giving lower credence to charitable giving doing good (on account of being aware that it can distort the functionality of the market mechanism) rather than them being greedier.
• Some of the findings are from artificial lab contexts that may be unrepresentative of the real world. For example, there are experiments in which economics students have defected more often than other students when playing prisoner’s dilemma, but Yezer, Goldfarb and Poppen have argued that this is unlikely to generalize to real world situations involving potential for cooperation.
• As usual, there’s a potential issue of publication bias.
• Publication bias and related issues are especially worrying in this context, because a lot of people have negative sentiments toward economists for a number of reasons: (i) people often disagree with economists’ political views as a class (ii) people are jealous of people who make more money than they do, and economics majors and economists make more money than others do (iii) those who are uncomfortable with quantitative subjects may be resentful that economists are facile with quantitative subjects (iv) economics involves harsh truths like the necessity of triage that many people find uncomfortable.

Also, many of the studies don’t distinguish between testing “studying economics causes greed” and testing “those who are greedy are more likely to study economics” (though a few do).

Subjective reports of the impact of majoring in economics on desire to make money

One would like subjective reports of how studying economics altered students’ desire to make money. My original post attracted some relevant comments at The Bill Fold, which I’ve pasted below. They are few, and may be unrepresentative.

moreadventurous:

I don’t think majoring in Econ made me more selfish

sherlock:

I was an economics major, and I definitely have a desire to earn a high income. It’s an interesting question, whether or not the econ major influenced that, since I definitely didn’t feel that way coming into college. For me, I think that what changed was a much more acute awareness of what a raw deal everyone except the very highest earners are getting in this economy. Some of that came from studying economics in the midst of the great recession, sure, but I think the bigger factor was just experiencing the effects of income inequality firsthand in a way that I hadn’t before.

DebtOrAlive

I’m not convinced majoring in Econ increases selfishness so much as Econ majors (except those academia-bound) tend to be practical and focused on achieving at the very least a securely upper middle class lifestyle. [Looks around apt, looks outside at neighborhood, checks account balances] If it was supposed to make me more selfish, it didn’t exactly work, cause I’m not raking it in over here.

diplostreetmix

I would add that rather than increasing selfishness, a good Econ courseload should improve someone’s decision-making. You’ll wonder to yourself if you are being rational in your choices or maximizing your utility, which helps you decide what to do.

dude

Econ major here who chose a career in government, so to answer Mike’s question, no! Though I probably did use my Econ background to fully assess the relative merits of good salary + pension + benefits/number of hours per workweek. 😉

Comparison of majors and nonmajors

As I said in my original post, one would like a comparison between majors of how desire for money evolves over the course of college. Such a study may exist, but I haven’t been able to find it. The results of such a study would not be decisive: social desirability bias plausibly leads survey respondents to report that money matters less to them than it actually does, and a difference between economics majors and other majors could reflect different degrees of social desirability bias rather than different degrees of desire to make money.

#3 Pre-existing ability as measured by tests

Here we have relatively good data. Economics majors score higher on standardized tests than other liberal arts majors do, and this can be expected to partially account for the wage gap, but the standardized test gap by itself isn’t large enough to explain the wage gap.

Average economic returns associated with higher SAT scores, and relative SAT scores of economics majors

Table A3 of Estimating the Return to College Selectivity Over the Career Using Administrative Earning Data seems to indicate that a 100 point increase in SAT score (on a scale of 1600) was, for the class of 1976, associated with a ~2% increase in income, and was, for the class of 1989, associated with a ~4% increase in income.

It’s been suggested that SAT math is what correlates with earnings rather than SAT verbal. If true, this would mean that a 50 point increase in math corresponds to the aforementioned percentages.

Given that the percentage increased between the class of 1976 and the class of 1989, one would expect it to have increased further since then. If one extrapolates linearly, one gets a ~6% difference in income for the class of 2002.

I found SAT score data from two sources, which I’ve given below. The data shows that economics majors score between 50 and 100 points higher than other majors, with more of the advantage in math than in verbal.

The 2009 paper Determining the Future Income of College Students gives figures as well, taken from a cohort of students who were between 13 and 17 in 1997. The columns are major, math SAT, verbal SAT, combined SAT, and the difference between total SAT and economics total SAT.

Based on this data, there’s a lot of uncertainty as to how much of the wage gap comes from ability as measured by standardized tests. But the wage gap can’t be fully explained by differences in pre-existing ability as measured by standardized test scores. Consider the case of economics vs. political science, where economics majors make 20% more. If one assumes that a 50 point increase in math SAT increases income by 6%, and that economics majors have math SAT 75 points higher than political science majors, then one finds that pre-existing ability as measured by standardized tests would predict a 9% wage gap, which is substantially less than 20%.

Comparison with graduates of elite colleges

Another perspective that shows that ability as measured by standardized tests can’t be driving most of the wage gap comes from comparing the earnings of economics majors with the earnings of graduates of elite colleges.

SAT scores of graduates of elite colleges are very high, with 75% of students scoring 700+ on a given section (at the 95th percentile or higher). The SAT scores of economics majors are lower: the highest subsection score listed above is 629 math, which is at the 85th percentile on the current SAT. This suggests that the 75th percentile of economics majors in SAT math is no more than the 93rd percentile for the general population (half way between 85th and 100th).

Payscale reports that graduates of elite colleges make on the order of $50k-$60k and that economics majors make ~$48k starting salaries. According to the National Association of Colleges and Employers Salary Survey, the 25th/50th/75th percentiles of earnings of economics majors are $43k/$53k/$66k. There’s some incongruity between the results of the different surveys, but it seems likely that the 75th percentile economics majors in starting salaries make more than the median graduate of an elite university. This is further supported by Payscale’s 2008 report, which says that the 75th percentile of midcareer earnings for economics majors is ~$140k, compared with ~$120k/year for the median graduate of an elite college.

So the 75th percentile economics majors have higher starting salary than median graduates elite colleges, despite having lower SAT scores. Furthermore, the median graduate of an elite college isn’t a randomly selected person with his or her SAT scores: he or she has other traits conducive to success (as measured by the college admissions process): despite these advantages, he or she makes less money than economics majors with lower SAT scores.

Note: The juxtaposition of the midcareer data from Payscale’s 2008 report with present day SAT averages may give an impression that the gap is larger than it is, because at the time when people who are currently in the middle of their career were in college, SAT averages at elite colleges were lower than they are now.

#4 Pre-existing desire to make money

Economics majors probably have more desire to make money than other liberal arts majors do, but the size of the effect is unclear.

Higher rates of selfishness?

Evidence about the influence of financial motivations on major selection

A number of research papers address how much weight college students give to future earnings when selecting a major. These papers vary in their results or in how they frame their results, or both.

For example, How do young people choose college majors? by Montmarquette, Cannings, and Mahseredjian (2002) says

The results of the paper show that the expected earnings variable is essential in the choice of a college major.

whereas Ability Sorting and the Returns to College Major by Arcidiacono (2003) says

Even after controlling for selection, large earnings premiums exist for certain majors. Differences in monetary returns explain little of the ability sorting across majors; virtually all ability sorting is because of preferences for particular majors in college and the workplace, with the former being larger than the latter.

and Choosing the Field of Study in Post-Secondary Education: Do Expected Earnings Matter? by Beffy, Fougère and Maurel (2009) says

Simulating for each given major a 10 percent increase in the expected earnings suggests that expected earnings have a statistically significant but quantitatively small impact on the allocation of students across majors.

We’re interested in how much economics majors respond to financial incentives relative to other majors.

The most relevant paper here seems to be Modeling college major choices using elicited measures of expectations and counterfactuals by Arcidiacono, Hotz, and Kang (2010). The sample size is small and possibly unrepresentative in relevant respects. The authors studied 173 undergraduates at Duke University, ~20% of whom were economics majors, and asked them questions involving them hypothetically majoring in other subjects. They grouped students into the categories of majors “science,” “humanities,” “engineering,” “social sciences,” “economics,” and “public policy.”

They find that

• Students in each major said that they would make more money if they were to major in economics than they would if they were to major in any other subject (Table 5).
• When asked what they would major in if their expected earnings were the same across majors, only 16.6% said that they would major in economics, as opposed to the actual figure of 19.7% (Table 10).
• Students of each major believed (on average) that they have the highest ability in their own major as opposed to others (Table 6).
• When asked what they would major in if their ability levels were the same across subjects, 23.8% said that they would major in economics, as opposed to the actual figure of 19.7%.

Taken together, the first two bullet points give the impression that ~15% of economics majors are in it for the money whereas 85% are not. If true, this would establish an upper bound on the desire of economics majors to make money relative to other majors.

The third and fourth bullet points raise the possibility that some students in other majors are as responsive to financial incentives as the economics majors who are responsive to financial incentives, so that the actual gap in responsiveness to financial incentives could be smaller than the 15% figure suggests.

As psychologist Robert Cialdini discusses in Influence: The Psychology of Persuasion, once people have made a decision, they tend to come up with multiple reasons why it was the right decision, unrelated to their original reason. It could be that of the 85% who said that they would major in economics anyway, for some, if they thought that their expected earnings were the same across majors before having decided on economics then they would have majored in something else. So the gap in responsiveness to financial incentives could be larger than the 15% figure suggests.

A relevant study with a larger sample size is Choosing the Field of Study in Post-Secondary Education: Do Expected Earnings Matter? by Beffy, Fougère and Maurel. (I have not vetted their analysis, and don’t know whether or not it’s reliable.) They group majors into “Sciences,” “Humanities and Social Sciences” and “Law, Economics and Management.” They find that a 10% decrease in earnings (for a given subject group relative to others) reduces the percent of students who major in the subject group by 0.234 absolute percentage points for the sciences, 0.347 for the humanities and social sciences, and 0.432 for law, economics and management, suggesting that economics majors are more responsive to financial incentives. About 33% of students majored in each subject area, so the changes relative to number of majors in a given subject are on the order of 1%.

One could interpret this as evidence that the students aren’t very responsive to financial incentives altogether, with law, economics and management students only marginally more than humanities and social science students. But it’s possible that one would see much a much greater diverge between the groups if one looked at the impact of a 20% or higher decrease in earnings rather than a 10% decrease in earnings. Perhaps what’s going on is that even if law, economics and management students made 10% less, they’d still be making more than they would in other majors, and they’d switch precisely at the point where they started making less money than they would in other majors.

Since law, economics and management are grouped together, the gap could be coming from law and management rather than economics.

#5 Signaling

Majoring in economics probably signals desirable traits to employers, but the degree to which this is true, and the impact on expected earnings is unclear. (On the latter point, note that college major plausibly plays much less of a signaling role decisions about raises and promotions than it does in hiring decisions.)

It’s worth noting that majoring in economics doesn’t have to be an accurate signal of a desirable trait in order for it to have signaling benefits: all that’s necessary is that employers believe that it’s a signal of the trait.

The fact that economics majors make more is a signal that they’re better employees

Unless one attributes the wage gap entirely to signaling (which would correspond to a belief that employers are generally mistaken in paying economics majors more), one can know that economics majors tend to be better workers, even if one doesn’t know why. Thus, employers will take the fact that economics majors make more money as a signal of quality. So the wage gap itself gives rise to signaling benefits.

Employer surveys

The preference for certain majors will be presumably be lower if one restricts to non-technical jobs. It should be noted that employers listed internships and employment during college as more significant than college major, with volunteer experience and extracurricular activities are not far behind. (pg. 24)

Presumably it’s easier to assess knowledge of field and applied skills in field for experienced job candidates than for inexperienced job candidates, so that the role of college major in hiring decisions would decrease over time, as one would expect.

Quotations from economics departments

As with human capital acquisition, college economics department webpages generally say that employers consider economics majors to be desirable workers, and these sources are biased. They dominate Google hits when one searches for information on whether majoring in economics signals quality.

Quotations from economists

1. “Mickey Mouse majors” = Majors with low financial rewards. Judged against standard #1, economics is clearly not a Mickey Mouse major. Adjusting for preexisting ability, economics is one of the most lucrative majors – almost on par with electrical engineering.

We asked economics students to identify majors as hard, moderate, or easy, and we found that 33 percent viewed economics as hard, 3 percent said sociology was hard, 7 percent saw psychology as hard, and 13 percent thought political science was hard. Since other social sciences were the primary alternative majors that most of the economics students considered, that data is compelling evidence that the respondents perceived those other majors as too easy. Students likely reasoned that taking a “too easy” major would signal to potential employers that the student had chosen an easy path through college, thereby hurting their chances of being hired.

Quotations from former college students

From Graduates Weigh In: What Is the Value of a Humanities Degree?

Anton Troianovski:

This attitude tracked with Harvard’s general message to freshmen, one that I think many of us accepted at face value: if you find the field of study that excites you most, the job search will take care of itself. Classmates would sometimes say they’d heard that Goldman Sachs and McKinsey may well hire a star of something like the folklore and mythology program over yet another cookie-cutter economics grad. This was in the booming mid-2000s. I wonder whether the harder economic times since then have made that message—emphasizing learning for learning’s sake—less convincing.

Jessica E. Lessin:

Most of the people I knew in college studied humanities. But they tried to make themselves more marketable to employers by squeezing in a class or two on economics. I think they were right to follow their interests. Recruiters at the time seemed more focused on how well you did in class, not what you studied. But if you wanted to work on Wall Street or at a consulting firm, an econ class didn’t hurt.

From Economics, Once a Perplexing Subject, Is Enjoying a Bull Run at Universities

For many students, however, economics is just the quickest way to land a good job. David Reinstein, 22 years old, started at George Washington University in a dual program of economics and political science. By the time he graduated in June, he had dropped the politics for economics alone. “People are impressed because it’s difficult,” Mr. Reinstein said. “Economics is respected.” His resume also impressed CNA Corp., an Arlington, Va., government contractor where Mr. Reinstein landed a job as a research specialist.

Wall Street Oasis forum threads 

These mostly concern getting jobs in finance:

Liberal arts major= DEATH SENTENCE or NOT?,

Do employers see a difference between an economics or a psychology major?

Duke Econ Major?

rejected twice !! Too liberal for the bank?!

The starting salary vs. midcareer salary test