How to become rich: Education and marriage

Gallup has researched the difference between the top 1% of Americans and the rest. Not surprisingly, the wealthy are better educated and married:

To better understand who makes up the top 1%, Gallup combined 61 of its nationwide surveys conducted between January 2009 and November 2011. The resulting sample includes nearly 400 adults in households earning $500,000 or more annually, and more than 65,000 in households earning less than that. The official top 1% of American households in 2010 includes those with incomes of at least $516,633, according to data from the Tax Policy Center as reported in The Washington Post.

Advanced Education Separates the 1% From the 99%

Apart from their bank accounts, Gallup finds education to be the greatest difference between the wealthiest 1% of Americans and everyone else. The Gallup analysis reveals that 72% of the wealthiest Americans have a college degree, compared with 31% of those in the lower 99 percentiles. Furthermore, nearly half of those in the wealthiest group have postgraduate education, versus 16% of all others.

More generally, college education is strongly correlated with household income. Nine percent of Americans earning less than $20,000 per year are college graduates; this rises to majorities of adults in all income groups above $100,000. Similarly, few adults in low-income households have postgraduate education, and this rises only into the teens among middle-income adults. But it sharply increases among those earning $100,000 or more, peaking at 49% among those earning between $250,000 and $499,000, and those earning at least half a million.

The educational differences between the nation's "1%" and "99%" exceed all other demographic as well as political differences seen between these groups in the Gallup data. The next-most-significant distinction is marital status, with nearly three-quarters of the very wealthy (73%) being currently married, compared with half of all others (51%). Accordingly, by 49% to 31%, the very wealthy are more likely to have minor children in the household.

The impact of marriage is pretty simple to explain: Two salaries pay more than one. Regarding education, as I've said in the past level of education matters a lot, but what you study is every bit as important. Despite the fact that society indoctrinates high school students to try to attend high-ranking universities, choosing the right college major matters far more than going to the right school.

The failures of the U.S. News college ranking system

The New York Times points out a major flaw in the U.S. News university ranking system. The article is about law schools, but it applies to their college rankings too.

From 1989 to 2009, when college tuition rose by 71 percent, law school tuition shot up 317 percent.

There are many reasons for this ever-climbing sticker price, but the most bizarre comes courtesy of the highly influential US News rankings. Part of the US News algorithm is a figure called expenditures per student, which is essentially the sum that a school spends on teacher salaries, libraries and other education expenses, divided by the number of students.

Though it accounts for just 9.75 percent of the algorithm, it gives law schools a strong incentive to keep prices high. Forget about looking for cost efficiencies. The more that law schools charge their students, and the more they spend to educate them, the better they fare in the US News rankings.

So, basically, universities are rewarded by U.S. News for not being cost-efficient. If they are cost-efficient, they get punished.

I have recently come to the conclusion that rewarding universities for being "selective" is another major flaw in the U.S. News college rankings. Taking smart students in and spitting smart students out is no great educational accomplishment. What should be rewarded is taking dumb students in and spitting smart students out.

By rewarding selectivity, universities get rewarded in the rankings for limiting access to education, rather than expanding it. Harvard, for example, has an endowment in the tens of billions of dollars. They could use that money to build university campuses throughout the U.S. or the world like the University of Phoenix does, but instead they invest their excess money in what is essentially a massive hedge fund. By restricting access to education, Harvard boosts its ranking. By expanding access to education, the University of Phoenix hurts its ranking.

I am certainly not suggesting that the University of Phoenix should be considered a highly-ranked school. I have no idea what the actual quality of their education is, but I am suggesting that universities should not be punished for taking the Bruce Lee approach of teaching anyone who wants to learn.

Which investments pay the most?

From David Leonhardt, via Greg Mankiw:

The Hamilton Project, a research group in Washington, has just finished a comparison of college with other investments. It found that college tuition in recent decades has delivered an inflation-adjusted annual return of more than 15 percent. For stocks, the historical return is 7 percent. For real estate, it’s less than 1 percent.

Is a Ph.D. worth the time and effort?

Here's an interesting tidbit from The Economist regarding Ph.D.'s:

PhD graduates do at least earn more than those with a bachelor’s degree. A study in the Journal of Higher Education Policy and Management by Bernard Casey shows that British men with a bachelor’s degree earn 14% more than those who could have gone to university but chose not to. The earnings premium for a PhD is 26%. But the premium for a master’s degree, which can be accomplished in as little as one year, is almost as high, at 23%. In some subjects the premium for a PhD vanishes entirely. PhDs in maths and computing, social sciences and languages earn no more than those with master’s degrees. The premium for a PhD is actually smaller than for a master’s degree in engineering and technology, architecture and education. Only in medicine, other sciences, and business and financial studies is it high enough to be worthwhile. Over all subjects, a PhD commands only a 3% premium over a master’s degree.

This does seem to disagree somewhat with the statistics from the U.S. Census Bureau, which showed that in the U.S. there is a smaller earnings gap between a bachelor's and a master's degree than between a master's and a Ph.D. Of course, the Census Bureau doesn't control for whether someone could have gotten into a degree program but chose not to enroll.

Is an MBA really worth the money?

The Economist challenges the conventional wisdom on the usefulness of an MBA education:

When you look at today’s most evolved business organisms, it is obvious that an MBA is not required for business success. Apple, which recently usurped Microsoft as the world’s largest technology firm (by market capitalisation), has hardly any MBAs among its top ranks. Most of the world’s top hedge funds prefer seasoned traders, engineers and mathematicians, people with insight and programming skills, to MBAs brandishing spreadsheets, the latest two-by-twos and the guilt induced by some watery ethics course.

In the BRIC economies, one sees fortunes being made in the robust manner of the 19th-century American robber barons, with scarcely a nod to the niceties of MBA programmes. The cute stratagems and frameworks taught at business schools become quickly redundant in the hurly-burly of economic change. I’ve often wondered what Li Ka-Shing of Hong Kong or Stanely Ho of Macao, or Rupert Murdoch, for that matter, would make of an MBA programme. They would probably see it for what it is: a business opportunity. And as such, they would focus on the value of investing in it.

They would look at the high cost, and note the tables which show that financial rewards are not evenly distributed among MBAs but tilt heavily to those from the very top programmes who tend to go into finance and consulting. Successful entrepreneurs are as rare among MBAs as they are in the general population.

They would think to themselves that business is fundamentally about two things, innovating and selling, and that most MBA programmes teach neither.

I must disagree with The Economist here. An MBA may not be required for business success, but it does pay more. According to Payscale.com, the average MBA salary is about 45% higher than the average Bachelor of Arts salary. Where you get your MBA does matter a lot, though. For example, the average Duke University MBA pays 80% more than the average University of Phoenix MBA. Also, while it doesn't take an MBA to be a successful entrepreneur, few people are actually entrepreneurs (and few entrepreneurs are actually successful).

How Asian-American parents raise successful children

On average, Asian-Americans outperform other races in both educational achievement and income. For example, according to the U.S. Census Bureau, Asian-American adults are much more likely to have bachelor's degrees than whites or blacks. In 2003, 49.8% of Asian-Americans over age 25 had bachelor's degrees, compared to 27.6% of whites and 17.3% of blacks. Also according to the U.S. Census Bureau, in 2008 Asian-Americans had per-capita incomes of $30,292, whites had per-capita incomes of $28,502, and blacks had per-capita incomes of $18,406.

The habits parents instill in their children influence educational achievement, and thus future income. So the question is: How do Asian-American parents tend to raise their children differently? Although stereotypical and controversial, an article by an Asian-American mother explains how some Asian parents raise their children differently than Western parents:

A lot of people wonder how Chinese parents raise such stereotypically successful kids. They wonder what these parents do to produce so many math whizzes and music prodigies, what it's like inside the family, and whether they could do it too. Well, I can tell them, because I've done it. ...

My Western friends who consider themselves strict make their children practice their instruments 30 minutes every day. An hour at most. For a Chinese mother, the first hour is the easy part. It's hours two and three that get tough. ...

What Chinese parents understand is that nothing is fun until you're good at it. To get good at anything you have to work, and children on their own never want to work, which is why it is crucial to override their preferences. This often requires fortitude on the part of the parents because the child will resist; things are always hardest at the beginning, which is where Western parents tend to give up. But if done properly, the Chinese strategy produces a virtuous circle. Tenacious practice, practice, practice is crucial for excellence; rote repetition is underrated in America. Once a child starts to excel at something—whether it's math, piano, pitching or ballet—he or she gets praise, admiration and satisfaction. This builds confidence and makes the once not-fun activity fun. This in turn makes it easier for the parent to get the child to work even more. ...

Chinese parents can order their kids to get straight As. Western parents can only ask their kids to try their best. ... Chinese parents demand perfect grades because they believe that their child can get them. If their child doesn't get them, the Chinese parent assumes it's because the child didn't work hard enough. ...

As a parent, one of the worst things you can do for your child's self-esteem is to let them give up. On the flip side, there's nothing better for building confidence than learning you can do something you thought you couldn't.

People tend to enjoy things they're good at, and people get good at what they practice a lot. If you want your children to excel, make them study and practice consistently for extended periods of time.

The three hours per day of musical instrument practice that the author mentions fits with research that says it takes a total of 10,000 hours of practice to become a world-class expert at any given skill. Three hours per day would be roughly 1,100 hours per year, or 10,000 hours in nine years. By comparison, at only 30 minutes of practice per day it would take 55 years to become a world-class expert.

What factors create better schools? Lessons from the international tests...

Asia-Pacific economies absolutely dominated the most recent PISA international student assessment tests.

Shanghai, China took the top spot in all three subject areas—reading, math, and science. Other Asia-Pacific outperformers were South Korea, Hong Kong, Singapore, New Zealand, Japan and Australia.

Our neighbor to the north, Canada, also outperformed the international average in all three subject areas. The United States, however, was mediocre. So were the big five European Union countries—Germany, France, United Kingdom, Italy and Spain.

Here are some finding from the OECD about what causes educational outperformance:

• Successful school systems provide all students, regardless of their socio-economic backgrounds, with similar opportunities to learn.
• Most successful school systems grant greater autonomy to individual schools to design curricula and establish assessment policies, but these school systems do not necessarily allow schools to compete for enrolment.
• School systems considered successful tend to prioritise teachers’ pay over smaller classes.
• The greater the prevalence of standards-based external examinations, the better the performance.
• Schools with better disciplinary climates, more positive behaviour among teachers and better teacher-student relations tend to achieve higher scores in reading.
• After accounting for the socio-economic and demographic profiles of students and schools, students in OECD countries who attend private schools show performance that is similar to that of students enrolled in public schools.

How Shanghai dominated the international student achievement test

On the most recent PISA international student assessment tests, Shanghai, China took the top spot in all three subject areas—reading, math, and science.

Here's how Shanghai, the top performer, gets its students to achieve:

When the results of an international education assessment put Shanghai and several other Asian participants ahead of the US and much of Western Europe, many Americans were shocked. ...

Shanghai trounced the OECD average: in reading, it got a 556, versus a 493 OECD average; in science, the score was 575 versus 501; and in math, there was a difference of more than 100 points – a 600 in Shanghai versus a 496 average. ... The results left many observers with one question: How did they do it? ...

Experts ascribe Shanghai’s success to China's assessment that academic achievement is foremost the result of hard work rather than a good teacher or innate talent.

“Students not only work harder, but they attribute their academic success to their own work,” says James Stigler, a professor of psychology at UCLA who has conducted research on the Chinese educational system. “Chinese students say the most important factor is studying hard. They really believe that’s the root of success in learning.”

That emphasis on hard work is complemented by several other key practices: active engagement by parents, early efforts to build up attention spans, and families' emphasis on spending long hours in school and on homework while doing little else. ...

Dr. Miller, a longtime observer of the Chinese educational system, has seen sweeping differences in the classroom.

In one study, he sat in first-grade math classes in the US and in Beijing and tracked the number of students who were paying attention throughout the lesson. At the end, about 90 percent of Chinese first graders were still following the lesson. Only about half of the Americans were.

The phenomenon was noted in the PISA report as well: “Typically in a Shanghai classroom, students are fully occupied and fully engaged. Non-attentive students are not tolerated,” it said.

The difference in instructional techniques plays a big role, Miller says. Chinese teachers tended to spend a long time giving instructions in the beginning, while American teachers gave cursory instructions then corrected students as the lesson continued. American students’ attention wandered when they became confused.

Another difference, particularly in math instruction, stood out to both Dr. Stigler and Miller. The US teaches procedurally in math, they noted – repetition of the same procedures until a student can remember reflexively how to solve a particular type of math problem. In China, students are encouraged to understand the connections between each step of the problem so that they can think their way through them, even if the order is forgotten.

In the US, we “do things over and over again until they sink in,” Miller says. “You don’t really know something until you can explain why you do this, why you don’t do that.”

Once one student in the classroom explains a problem correctly, the next student has to explain it, too. That is often repeated until most or all of the students can confidently work their way through a problem, Miller says. It’s a bit different from the US practice of calling on one or two raised hands, then moving on.

The highest-paying college majors

Here are the 25 highest-paying bachelor degrees according to Payscale.com, ranked by median mid-career salary:

Here's what Payscale.com says about the list:

Only employees who possess a Bachelor's Degree and no higher degrees are included. This means Bachelor graduates who go on to earn a Master's degree, MBA, MD, JD, PhD, or other advanced degree are not included.

For some Liberal Arts, Ivy League, and highly selective schools, graduates with degrees higher than a bachelor's degree can represent a significant fraction of all graduates.

Careers that require advanced degrees, such as law or medicine, are not included.

In case you don't see your college major in the graph, the full list can be found here.

For students who major in physics, I highly recommend a minor in computer science. For students who major in mathematics or statistics, I highly recommend a minor in either computer science or finance. Having an applied skill that complements your "pure" math or science major will give you far better employment opportunities after graduation.

As I've said before on this blog, I think a technical bachelor's degree (e.g. engineering or computer science) combined with an M.B.A. makes a powerful combination that will result in a very high salary. An M.B.A. is also a good follow-up to a degree in economics, finance, accounting, marketing, or information systems.

Previously, I have blogged about average starting salary by category of college major and about median earnings by level of education.

Top ten highest-paying college majors

According to the National Association of Colleges and Employers, these are currently the ten highest-paying college majors for new college graduates:

1. Petroleum Engineering — $86,220
2. Chemical Engineering — $65,142
3. Mining & Mineral Engineering (incl. geological) — $64,552
4. Computer Science — $61,205
5. Computer Engineering — $60,879
6. Electrical/Electronics & Communications Engineering — $59,074
7. Mechanical Engineering — $58,392
8. Industrial/Manufacturing Engineering — $57,734
9. Aerospace/Aeronautical/Astronautical Engineering — $57,231
10. Information Sciences & Systems — $54,038

In general, technical majors pay the most. Finance-related majors (e.g. finance, accounting, economics, business) are the second-highest-paying group of majors. Health and natural sciences come next. Liberal arts, agriculture, and education majors pay the least. A technical undergraduate degree combined with an M.B.A. pays extremely well. For more on this topic, see here.

Unemployment rate by level of education

In case you can't read the legend, the education categories are:

• Less than high school diploma
• High school graduate, no college
• Some college or associate's degree
• Bachelor's degree or higher
  

Click on the graph to see the full-sized version:

I find it interesting to see that the typical unemployment rate for someone with a college degree is only about 2-3%.

From Calculated Risk.

The key to talent

Public schools: Elites vs. the middle class

Another reason to favor school choice over the public school monopoly, from Wikipedia:

Randall Collins contributed the idea of credentialism to the study of class-based differences in educational attainment. Collins maintains that public schools are socializing institutions that teach and reward middle class values of competition and achievement. Anglo-Protestant elites are selectively separated from other students and placed into prestigious schools and colleges, where they are trained to hold positions of power. By teaching middle-class culture through the public education system, the elite class ensures a monopoly over positions of power, while others acquire the credentials to compete in a subordinate job market and economy. In this way, schools of medicine, law, and elite institutions have remained closed to members of lower classes.

Thus, as I interpret this paragraph, the hypothesis says prestigious private schools teach how to lead, while the public school monopoly teaches how to serve.

Starting salary by category of college major

Here is a graph of starting salaries by general category of college major. These are the starting salaries for bachelor's degrees. Notice that technology-oriented degrees pay substantially more than other degrees. Business and science degrees take up the middle of the pack. Liberal arts and education majors are at the bottom.

Source: NACE Salary Survey, Fall 2009

If a student goes on to business school, law school, or medical school, the choice of undergraduate major would generally lose its influence on salary. Some natural complements are a liberal arts bachelor's degree combined with a law degree, a health sciences bachelor's degree combined with a medical degree,* or a liberal arts, sciences, or business bachelor's degree combined with an M.B.A.

One case in which the undergraduate degree continues to have a large influence on salary is the powerful mix of an engineering or computer science bachelor's degree combined with an M.B.A. This is because managers with both technical and business skills are needed at many computer, aerospace, and industrial companies.

I wonder how seeing a graph like this in high school might have affected my choice of college major. Probably not much since my multiple requests for a computer in high school were denied by my then-Luddite parents. Thus, I was intimidated by computers when I entered college.

People who like this post may also be interested in a previous blog post of mine, earnings by level of education.

* I have no idea how stringent the prerequisites are for medical school.

Democrats are hurting the poor

The public school monopoly keeps millions of the inner-city poor trapped in inter-generational poverty, because they can't get a decent education. The Democratic Party opposes systemic changes to this failing system.

Sweden does schools better

New York Times video: Even Sweden supports school choice.

Only in the U.S. is school choice a right wing vs. left wing debate. Many left-leaning European countries happily embrace school choice.

On schools, Democrats oppose economic equality

The Agitator highlights the Democrats' policy of special privileges for the rich and powerful when it comes to educating children:

Why is it that the Democrats are all about government programs to reduce inequality... except when it comes to letting poor people send their kids to the same schools the kids of politicians attend?

The standardized testing data on the D.C. voucher program is inconclusive. But parents are overwhelmingly happy with the program. Which frankly is a hell of a lot better measure of its effectiveness. ...

The Democrats’ opposition to the D.C. voucher program is completely disingenuous. The program didn’t take a dime from the District’s public schools. Only New York and New Jersey spend more money per pupil than D.C. And D.C.’s public schools are horrible. Something isn’t right. And the solution isn’t to trap as many kids in those chronically failing schools as possible.

President Obama is unwilling to have his own daughters attend public schools (both when he lived in Chicago and now that he lives in D.C.), but he is perfectly willing to condemn poor African-American and Hispanic children to an inferior education and an economically disadvantaged future.

Barack Obama: School choice hypocrite

Like the Clintons before them, the Obamas prove to be school choice hypocrites, favoring school choice for wealthy people like themselves but favoring underperforming public school monopolies for the poor and middle class:

The Associated Press is reporting that the Obamas have chosen the Sidwell Friends School in Washington for daughters Sasha, seven years old, and Malia, 10. The private Quaker school’s alumni include former presidential offspring Chelsea Clinton and Tricia Nixon Cox, as well as a former princess of Japan.

Sidwell Friends beat out another elite school, Georgetown Day School. Michelle Obama and her daughters reportedly visited both schools on Tuesday. Sidwell, with campuses in Northwest Washington and Bethesda, Md., is home to nearly 1,100 students from pre-Kindergarten to 12th grade. Tuition at the lower school is $28,442 and $29,442 at the middle and upper schools.

A spokeswoman for Michelle Obama was quoted by AP as saying the Obamas feel Sidwell provides “the best fit for what their daughters need now,” including being able to accommodate security and privacy concerns. The Obama girls have also become good friends with Vice President-elect Joe Biden’s grandchildren, who attend the school.

The Obama family also discussed public school options for the girls, according to Washington Mayor Adrian Fenty. The girls currently attend the private University of Chicago Laboratory Schools located in Chicago’s South Side.

Cato @ Liberty points out the hypocrisy:

A few months ago, Barack Obama told a gathering of the American Federation of Teachers that he opposes private school choice programs, adding: “We need to focus on fixing and improving our public schools; not throwing our hands up and walking away from them.”

It’s not clear whether or not the president-elect will be able to fix our public schools, and I don’t know if he’s thrown up his hands, but he and his two daughters have just walked away from the public schools. Again. When they move from Chicago to D.C., Malia and Sasha Obama will be moving from the prestigious private Lab School to the prestigious private Sidwell Friends school — Chelsea Clinton’s old stomping ground.

Not that there’s anything wrong with that. In fact, it’s wonderful that the Obamas had such a broad range of public and private school choices available to them. What’s puzzling is that the president-elect opposes programs that would bring that same easy choice of schools within reach of families who lack his personal wealth.

The reason one should favor school choice is that our public school system is a monopoly and monopolies tend to be inefficient. Competition forces institutions to improve or die. Monopoly allows them to stagnate.

America's colleges have to compete with each other, so it is not surprising that our college system is widely considered the best in the world. Our local public school monopolies face almost no competition, so it should not be surprising that America's public school students generally rank quite low on international tests.

With regards to different standards for the rich and powerful, Barack Obama is not change we can believe in. Instead, he's just more of the same.

Barack Obama's hypocrisy on school choice

Cato-at-Liberty points out Barack Obama's hypocrisy on school choice.

After telling a gathering of the American Federation of Teachers that he opposes school voucher programs ... Senator Obama added that: “We need to focus on fixing and improving our public schools; not throwing our hands up and walking away from them.”

Senator Obama sends his own two daughters to the private “Lab School” founded by John Dewey in 1896, which charged $20,000 in tuition at the middle school level last year. Though he says “we” should not be “throwing up our hands and walking away” from public schools, he has done precisely that.

That is his right, and, as a wealthy man, it is his prerogative under the current system of American education, which allows only the wealthy to easily choose between private and government schools. But instead of offering to extend that same choice to all families, Senator Obama wants the poor to wait for the public school system to be “fixed.”

The reason one should favor school choice is that our public school system is a monopoly and monopolies tend to be inefficient. Competition forces institutions to improve or die. Monopoly allows them to stagnate.

America's colleges have to compete with each other, so it is not surprising that our college system is widely considered the best in the world. Our local public school monopolies face almost no competition, so it should not be surprising that America's public school students generally rank quite low on international tests.

Graph: earnings by level of education

Notice that there are two big gaps in the graph. The first is between "some college" and a bachelor's degree. The second is between a master's degree and a doctoral/professional degree.