Economics majors and earnings: further exploration

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:


<col> <col>
Philos­o­phy 103.5
Eco­nomics 96.8
PoliSci 91.7
His­tory 81.1
English 70.3
Psy­chol­ogy 68.2
So­ciol­ogy 59.5

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.

Hetero­gene­ity in hu­man cap­i­tal in­vest­ments: High school cur­ricu­lum, col­lege ma­jor, and ca­reers (Table 1) gives in­for­ma­tion on SAT score by ma­jor for stu­dents from 1993-2003. Some of the data therein is in the fol­low­ing table. The columns are ma­jor, math SAT, ver­bal SAT, com­bined SAT, and the differ­ence be­tween to­tal SAT and eco­nomics to­tal SAT.
<col> <col> <col> <col>
Eco­nomics 597 575 1172 0
PoliSci 542 571 1113 −59
His­tory 558 595 1153 −19
Psy­chol­ogy 530 540 1070 −102

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.


<col>
Eco­nomics 629 588 1217 0
PoliSci 573 580 1153 −64
His­tory 552 616 1168 −49
English 562 609 1171 −46
Psy­chol­ogy 554 579 1133 −84
So­ciol­ogy 486 508 994 −223

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?

As dis­cussed in the sec­tion “#2 Ac­qui­si­tion of a de­sire to make money,” there’s psy­chol­ogy re­search pur­port­ing to show that eco­nomics stu­dents and pro­fes­sors plac­ing ma­te­rial gain above helping oth­ers, rel­a­tive to other peo­ple. In some cases this re­search does not dis­en­tan­gle cor­re­la­tion and cau­sa­tion, leav­ing open the pos­si­bil­ity that those who choose to study eco­nomics give more weight to hav­ing money. As above, there’s rea­son to be skep­ti­cal of this re­search.

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

Ac­cord­ing to a sur­vey of the The Chron­i­cle of Higher Ed­u­ca­tion:
  • Eco­nomics is one of the most de­sired ma­jors in busi­ness (pg. 67)

  • 19% of em­ploy­ers state that they look for spe­cific ma­jors, 44% value some over oth­ers, 34% say that they bal­ance it with other fac­tors, and 3% say that it’s not im­por­tant at all. (pg. 64).

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)

A 2013 Gal­lup poll of busi­ness lead­ers asked about the weights that they as­sign to differ­ent fac­tors when mak­ing hiring de­ci­sions. What they in­di­cated is sum­ma­rized be­low. (The columns start­ing with the sec­ond are the per­cent who ranked the fac­tor as “very im­por­tant”, “some­what im­por­tant” “not very im­por­tant” and “not at all im­por­tant”)
<col><col><col><col>
Knowl­edge of field 84 14 2 0
Ap­plied skills in field 79 16 2 2
Col­lege Ma­jor 28 42 22 8
Col­lege at­tended 9 37 40 14

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

As above, economist Bryan Ca­plan thinks that eco­nomics teaches few em­ploy­able skills, but also writes
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.
sug­gest­ing that he be­lieves that be­ing an eco­nomics ma­jor has sig­nifi­cant sig­nal­ing benefits.
In “Eco­nomics: The “Just Right” Liberal-Arts Ma­jor?” Economist David Colan­der wrote
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

The same con­sid­er­a­tions in the sub­sec­tion “The start­ing salary vs. mid­ca­reer salary test” of the sec­tion “#1 Hu­man cap­i­tal ac­qui­si­tion” of this post ap­ply to as­sess­ing the role of sig­nal­ing.

Other ex­plana­tory hypotheses

  • As diplostreet­mix wrote at The Bill Fold, ma­jor­ing in eco­nomics may not in­crease de­sire to make money rel­a­tive to other de­sires, but rather, could help peo­ple learn to co-op­ti­mize to meet their goals bet­ter in gen­eral, and this could help them get higher pay­ing jobs, even if the sub­ject mat­ter knowl­edge isn’t use­ful to them on the job.

  • There could be a cor­re­la­tion be­tween find­ing eco­nomics in­ter­est­ing and find­ing cer­tain jobs that hap­pen to be high pay­ing in­ter­est­ing, even in ab­sence of a di­rect con­nec­tion be­tween the sub­ject mat­ter of eco­nomics and what’s done on the job, and in­de­pen­dent of fi­nan­cial con­sid­er­a­tions. This would in­duce a cor­re­la­tion be­tween ma­jor­ing in eco­nomics and earn­ing money.

Cross-posted to the Cog­nito Men­tor­ing blog