More education ≠ higher incomes

People with bigger shoe sizes have, on average, higher IQs. In a large representative population, this is absolutely true. But does this mean that smart people have big feet? Or that small-footed people are stupid? This "statement" is often-used in statistics courses when showing that correlation does not necessarily mean causation. The reason that people with larger shoe sizes have higher IQs is that as people age and get older, their feet grow, as do their knowledge bases. So it's not that X causes Y or Y causes X but rather Z causes both X and Y, two otherwise-unrelated variables.

With this concept in mind, let's explore education. We always hear how higher-educated people have substantially higher starting salaries, higher median incomes, and higher wealth-accumulation abilities. Therefore, we have this notion in which we feel that if we go to college and get degrees, we will have better incomes. But is this really the case? Brace yourself because I'm going to blow your mind (or, at least, my mind was blown--BLOWN--when I learned about the following theory that I will attempt to detail).

People think that they go on to higher education (undergraduate, graduate, doctorate, law school, med school, etc.) to advance their careers, gain knowledge and a better understanding of the world, and have higher starting salaries when they embark on their chosen career path. But what they are actually doing, though, is signaling to employers that they are high-productivity individuals. That is, because they went on from high school to pursue higher education, they are much more likely to be highly-productive than those who decided they were finished with education with just a high school diploma.

For example, taking a step downward on the education ladder, people with high school diplomas obviously have higher median incomes than high school dropouts. However, we are led to believe that high school diplomas and GEDs (general educational diploma or general equivalency diploma) are about the same and that people with one or the other have similar incomes (since "high school diploma" and "high school equivalent" are almost always grouped together). But what do we see when we make GED its own category? How would its median income look compared to that of high school dropouts and to that of high school diplomas? Interestingly enough, the median income of GEDs is closer to that of high school dropouts than to high school diplomas. So we are forced to determine why this is the case. To unravel this conundrum, we need only look at the population of people who have high school diplomas, who are high school dropouts, and who get GEDs. The characteristics of people with GEDs more closely resemble the traits of dropouts.

Now why did I just overly-inform you about the financial statuses of high school equivalents and dropouts? Going back to my contention that education does not determine future income, we see that even though GEDs and high school diplomas should be on-par with one another, the income level of each group is vastly different. People with high school diplomas stick it out for 4 years, while people who received GEDs basically dropped out for reasons probably akin to the reasons high school dropouts leave school. We see here that high school serves as a filter between the "more-productive" high school diploma people and the "less-productive" GEDs and high school dropouts. So getting that GED will not necessarily put you on the same income level as that of high school diplomas because people with diplomas don't make more income necessarily because they have more education but instead because by finishing high school, they have signaled that they (on average) are more productive individuals. And it is in being more productive that people gain more income and potential for upward movement in the workplace, both positionally and financially. It is not solely due to more education.

Bringing back higher education into the picture, we see a parallel to the high school case in that people who finish a 4-year degree being more likely to be "high-productivity" people than those who are college dropouts or finish 2-year degrees. Likewise, 4-year degrees are likely to be "less-productive" than masters degrees, professional degrees, and doctorate degrees.

So essentially, education serves as a filter for high-productivity people. Much in the same way that panning for gold separates the gold from the dirt/rocks/pebbles, education separates high-productivity people from low-productivity people. Therefore, it's not that getting more education will garner higher salaries; instead, it's that the people who naturally would want to get more education are likely to be more-productive and thus better-suited to advance economically in the workplace.

Ergo, more education does not necessarily cause higher income. Instead, being a high-productivity person could cause one to want to go on to higher education and to be professionally-efficient (causing one to be much more likely to get raises or promotions). I say "could cause" because there are always exceptions, such as highly-productive college dropouts like Bill Gates or Michael Dell. It's not a "fit-all" standard, of course, but it's definitely a "fit-most" rule.

By the way, this economic theory is part of the Signal Model. Your level of education signals to firms looking to hire you if you're a high-productivity or low-productivity person since they can't know how productive you may be until years down the line. Education simply serves as one of the signals firms can use to determine your potential capacity. So if you have a lot of high-productivity signals, you're probably more likely to be hired because you have better potential to produce more output for the firm over the length of your career with them.


NOTE: My apologies for the sucky pictures; recommendations to replace them are welcome! :-D Also, the chart picture isn't the ideal example I was trying to find of GED versus high school diploma, but it is extremely difficult to find something that is. If I find something better, I will be replacing it at will. Thanks!


Unrelated, but I'm currently listening to a cover of Bob Dylan's "Boots of Spanish Leather" by Tyler Hilton (and Alexa):