In general, the availability of lower quality, lower cost, consumer choices is beneficial to low income people who often are able to afford these goods when the bottom rung of the product quality ladder is lowered. The availability of a new line of washing machines that is cheaper, crappier, and dies sooner than any kind before it can mean that many families are able for the first time to have a washing machine. However, when information is uncertain, and the decisions are being made by individuals with myopically high discount rates or high costs of attaining information about the value of the good, the the availability of these goods can make them worse off. A recent NBER paper by James Heckman, John Humphries, and Nicholas Mader sums up the economic literature on the GED, and suggests that the GED may be one of these low quality products that is doing more harm than good by causing students to substitute graduating high school for dropping out and getting a GED. One study the authors cite found that the option of GED causes four-year high school completion rates to fall by 5%.
This would not be a problem if the returns to a GED were close to that of a high school degree, or significantly greater than dropping out. Unfortunately, the GED does not seem to significantly improve labor market outcomes compared dropping out, whereas high school graduation improves them greatly:
Once Heckman and LaFontaine correct for selection and control for AFQT scores, male GEDs earn on average 1% less per hour than dropouts while terminal high school graduates make 3.6% more per hour on average than dropouts. Similarly the and that female GEDs earn 1.7% more per hour than dropouts while high school graduates with no college earn 10.6% more per hour. They also show that the GED has little or no benfit after controlling for reported test scores using the National Adult Literacy Survey (NALS) data.
This problem of substitution to lower quality is relevant to recent discussions of the value of lower quality private, for-profit colleges, and Walmart’s new program that helps it’s workers earn college degrees. Are these options increasing human capital or simply allowing people to substitute away from more valuable educational choices by lowering the effort bar? I am not going to make that claim, but simply suggest that it is a question worth asking.
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Tuesday ~ June 8th, 2010 at 10:31 am
The Smart Money « Modeled Behavior
[...] has a series of posts on the market for education. His latest details a paper by Jim Heckman showing that the availability of GEDs might actual make students worse off [...]
Tuesday ~ June 8th, 2010 at 11:11 am
Rebecca Burlingame
There will doubtless be people who can claim the Wal-Mart education plan will not pay off, especially as there are fewer jobs to go around now even for graduates of traditional colleges. Even so, the concept is intriguing. How might Wal-Mart actually approach this? Will the education be for specific functions of the workplace or does the corporation simply think this is an amenity it is perfectly capable of providing for more general reasons? I live in an area where any exposure to additional education can make a difference for people who are relatively poor…no, not necessarily in terms of money, but in terms of outlook on life.
Wednesday ~ June 9th, 2010 at 10:18 am
jsalvati
I think it’s an interesting that the GED does not improve labor market outcomes. Is it just that people don’t learn the material when they get their GED? Or perhaps even high school is purely signaling. Or maybe the high school environment is the valuable part and the learning is mostly irrelevant.