Insiders Power July 2014

An InterAnalyst Publication
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Russia Is On The Verge Of Dealing A Massive Blow To The Petrodollar.

Is the petrodollar monopoly about to be shattered? When U.S. politicians started slapping economic
sanctions on Russia, they probably never even imagined that there might be serious consequences for
the United States. But now the Russian media is reporting that the Russian Ministry of Finance is getting
ready to pull the trigger on a "de-dollarization" plan. For decades, virtually all oil and natural gas around
the world has been bought and sold for U.S. dollars. As I will explain below, this has been a massive
advantage for the U.S. economy. In recent years, there have been rumblings by nations such as Russia
and China about the need to change to a new system, but nobody has really had a big reason to upset
the status quo. However, that has now changed. The struggle over Ukraine has caused Russia to
completely reevaluate the financial relationship that it has with the United States. If it starts trading a
lot of oil and natural gas for currencies other than the U.S. dollar that will be a massive blow for the
petrodollar, and it could end up dramatically changing the global economic landscape.
The fact that the Russian government has held a meeting to discuss "getting rid of the US dollar in
Russian export operations" should be front page news on every mainstream news website in the United
States. That is how big this is. But instead, we have heard nothing from the big mainstream news
networks about this so far. Instead, we have only heard about this from Russian news sources such
as the Voice of Russia...
Russian press reports that the country's Ministry of Finance is ready to greenlight a plan to radically
increase the role of the Russian ruble in export operations while reducing the share of dollardenominated transactions. Governmental sources believe that the Russian banking sector is "ready to
handle the increased number of ruble-denominated transactions".
According to the Prime news agency, on April 24th the government organized a special meeting
dedicated to finding a solution for getting rid of the US dollar in Russian export operations. Top level
experts from the energy sector, banks and governmental agencies were summoned and a number of
measures were proposed as a response for American sanctions against Russia.
The "de-dollarization meeting" was chaired by First Deputy Prime Minister of the Russian Federation
Igor Shuvalov, proving that Moscow is very serious in its intention to stop using the dollar.
So will Russia go through with this?
After all, this wouldn't just be a slap in the face. This would essentially be like slamming an economic fist
into our nose.
You see, Russia is not just a small player when it comes to trading oil and natural gas. The truth is that
Russia is the largest exporter of natural gas and the second largest exporter of oil in the world.
Copyright 2014 InterAnalyst, LLC
If Russia starts asking for payment in currencies other than the U.S. dollar, that will essentially end the
monopoly of the petrodollar.
In order to do this, Russia will need trading partners willing to go along. In the article quoted above, the
Voice of Russia listed Iran and China as two nations that would potentially be willing to make the switch.
Of course, the success of Moscow's campaign to switch its trading to rubles or other regional currencies
will depend on the willingness of its trading partners to get rid of the dollar. Sources cited by
Politonline.ru mentioned two countries who would be willing to support Russia: Iran and China. Given
that Vladimir Putin will visit Beijing on May 20, it can be speculated that the gas and oil contracts that
are going to be signed between Russia and China will be denominated in rubles and yuan, not dollars.
For decades the US has benefited to the tune of trillions of dollars-worth of free credit from the
greenback's role as the default global reserve unit.
But as the global economy trembled before the prospect of a US default last month, only averted when
Washington reached a deal to raise its debt ceiling, China's official Xinhua news agency called for a "deAmericanised" world.
It also urged the creation of a "new international reserve currency... to replace the dominant US dollar".
The Chinese understand what is going on, and when the dust settles they plan to be the last ones
standing. In the aftermath of a U.S. collapse, China anticipates having the largest economy on the
planet, more gold than anyone else, and a respected international currency that the rest of the globe
will be able to use to conduct international trade.
And China is not just going to sit back and wait for all of this to happen. In fact, they are already doing
lots of things to get the ball moving. The following are 9 signs that China is making a move against the
U.S. dollar...
1. Chinese credit rating agency Dagong has downgraded U.S. debtfrom A to A- and has indicated
that further downgrades are possible.
2. China has just entered into a very large currency swap agreement with the eurozone that is
considered a huge step toward establishing the yuan as a major world currency. This agreement
will result in a lot less U.S. dollars being used in trade between China and Europe...
The swap deal will allow more trade and investment between the regions to be conducted in
euros and yuan, without having to convert into another currency such as the U.S. dollar first,
said Kathleen Brooks, a research director at FOREX.com.
"It's a way of promoting European and Chinese trade, but not doing it with the U.S. dollar," said
Brooks. "It's a bit like cutting out the middleman, all of a sudden there's potentially no U.S. dollar
risk."
3. Back in June, China signed a major currency swap agreement with the United Kingdom. This
was another very important step toward internationalizing the yuan.
4. China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S.
debt is starting to become a major political issue within China.
5. Mei Xinyu, Commerce Minister adviser to the Chinese government, warned that if the U.S.
government ever does default that China may decide to completely stop buying U.S. Treasury
bonds.
6. According to Yahoo News, China has already been looking for ways to diversify away from the
U.S. dollar...
There have been media reports this week that China's State Administration of Foreign Exchange,
the body that handles the country's $3.66 trillion of foreign exchange reserve, is looking to
diversify into real estate investments in Europe.
7. Xinhua, the official news agency of China, called for a "de-Americanized world" this week, and
also made the following statement about the political turmoil in Washington: "The cyclical
stagnation in Washington for a viable bipartisan solution over a federal budget and an approval
for raising debt ceiling has again left many nations' tremendous dollar assets in jeopardy and the
international community highly agonized."
8. Xinhua also said the following about the U.S. debt deal on Thursday: "Politicians in Washington
have done nothing substantial but postponing once again the final bankruptcy of global
confidence in the U.S. financial system". The commentary in the government-run publication
also declared that the debt deal "was no more than prolonging the fuse of the U.S. debt bomb
one inch longer."
9. China is the largest producer of gold in the world, and it has also been importing an absolutely
massive amount of gold from other nations. But instead of slowing down, the Chinese appear
to be accelerating their gold buying. In fact, money manager Stephen Leeb says that his sources
are telling him that China plans to buy another 5,000 tons of gold. There are many that are
convinced that China eventually plans to back the yuan with gold and try to make it the number
one alternative to the U.S. dollar.
So why is the petrodollar so important?
Well, it creates a tremendous amount of demand for the U.S. dollar all over the globe. Since everyone
has needed it to trade with one another, that has created an endless global appetite for the
currency. That has kept the value of the dollar artificially high, and it has enabled us to import trillions
of dollars of super cheap products from other countries. If other nations stopped using the dollar to
trade with one another, the value of the dollar would plummet dramatically and we would have to pay
much, much more for the trinkets that we buy at the dollar store and Wal-Mart.
In addition, since the U.S. dollar is essentially the de facto global currency, this has also increased
demand for our debt. Major exporting nations such as China and Saudi Arabia end up with giant piles of
our dollars. Instead of just letting them sit there and do nothing, those nations often reinvest their
dollars into securities that can rapidly be changed back into dollars if needed. One of the most popular
ways to do this has been to invest those dollars in U.S. Treasuries. This has driven down interest rates
on U.S. debt over the years and has enabled the U.S. government to borrow trillions upon trillions of
dollars for next to nothing.
But if the rest of the world starts moving away from the U.S. dollar, all of this could change.
In order for our current standard of living to continue, it is absolutely imperative that everyone else
around the globe continues to use our currency.
So if Russia really does pull the trigger on a "de-dollarization" strategy, that would be huge - especially if
the rest of the planet started following their lead.
The U.S. economy is already teetering on the brink of another major downturn, and there are a whole
host of indications that big trouble is on the horizon. Just about the last thing that we need right now is
for our petrodollar monopoly to be threatened.
It would be nice if things would calm down in Ukraine and the relationship between the United States
and Russia could go back to normal.
Sadly, that does not appear likely any time soon, in fact . . .
Russia Is Doing It Russia Is Actually Abandoning The Dollar

The Russians are actually making a move against the petrodollar. It appears that they are quite serious
about their de-dollarization strategy. The largest natural gas producer on the planet, Gazprom, has
signed agreements with some of their biggest customers to switch payments for natural gas from U.S.
dollars to euros. And Gazprom would have never done this without the full approval of the Russian
government, because the Russian government holds a majority stake in Gazprom. There hasn't been a
word about this from the big mainstream news networks in the United States, but this is huge. When
you are talking about Gazprom, you are talking about a company that is absolutely massive. It is one of
the largest companies in the entire world and it makes up 8 percent of Russian GDP all by itself. It holds
18 percent of the natural gas reserves of the entire planet, and it is also a very large oil producer. So for
Gazprom to make a move like this is extremely significant.
When Barack Obama decided to slap some meaningless economic sanctions on Russia a while back, he
probably figured that the world would forget about them after a few news cycles.
But the Russians do not forget, and they certainly do not forgive.
At this point the Russians are turning their back on the United States, and that includes the U.S. dollar.
What you are about to read is absolutely stunning, and yet you have not heard about it from any major
U.S. news source. But what Gazprom is now doing has the potential to really shake up the global
financial landscape. The following is an excerpt from a news report by the ITAR-TASS news agency...
Gazprom Neft had signed additional agreements with consumers on a possible switch from dollars to
euros for payments under contracts, the oil company's head Alexander Dyukov told a press conference.
"Additional agreements of Gazprom Neft on the possibility to switch contracts from dollars to euros are
signed. With Belarus, payments in roubles are agreed on," he said.
Dyukov said nine of ten consumers had agreed to switch to euros.
And Gazprom is not the only big company in Russia that is moving away from the U.S. dollar.
According to the Russian Times, other large Russian corporations are moving to other currencies as
well...
Russia will start settling more contracts in Asian currencies, especially the yuan, in order to lessen its
dependence on the dollar market, and because of Western-led sanctions that could freeze funds at any
moment.
Over the last few weeks there has been a significant interest in the market from large Russian
corporations to start using various products in renminbi and other Asian currencies, and to set up
accounts in Asian locations, Pavel Teplukhin, head of Deutsche Bank in Russia, told the Financial
Times, which was published in an article on Sunday.
Diversifying trade accounts from dollars to the Chinese yuan and other Asian currencies such as the
Hong Kong dollar and Singapore dollar has been a part of Russias pivot towards Asian as tension with
Europe and the US remain strained over Russias action in Ukraine.
And according to Zero Hedge, "expanding the use of non-dollar currencies" is one of the main things
that major Russian banks are working on right now...
Andrei Kostin, chief executive of state bank VTB, said that expanding the use of non-dollar currencies
was one of the banks main tasks. Given the extent of our bilateral trade with China, developing the
use of settlements in roubles and yuan [renminbi] is a priority on the agenda, and so we are working on
it now, he told Russias
President Vladimir Putin
during a briefing. Since
May, we have been
carrying out this work.
There is nothing wrong
with Russia trying to
reduce its dependency
on the dollar, actually it
is an entirely reasonable
thing to do, said the
Russia head of another
large European bank. He
added that Russias
large exposure to the
dollar subjects it to
more market volatility in
times of crisis. There is
no reason why you have
to settle trade you do
with Japan in dollars, he said.
The entire country is undergoing a major financial conversion.

This is just staggering.
Meanwhile, Russians have been pulling money out of U.S. banks at an unprecedented pace...
So in March, without waiting for the sanction spiral to kick in, Russians yanked their moolah out of US
banks. Deposits by Russians in US banks suddenly plunged from $21.6 billion to $8.4 billion. They yanked
out 61% of their deposits in just one month! They'd learned their lesson in Cyprus the hard way: get
your money out while you still can before it gets confiscated.
For those that don't think that all of this could hurt the U.S. economy or the U.S. financial system, you
really need to go back and read my previous article entitled "De-Dollarization: Russia Is On The Verge
Of Dealing A Massive Blow To The Petrodollar". The truth is that the U.S. economic system is
extremely dependent on the financial behavior of the rest of the globe.
Because nearly everyone else around the rest of the planet uses our currency to trade with one another,
that keeps the value of the U.S. dollar artificially high and it keeps our borrowing costs artificially low.
As Russia abandons the U.S. dollar that will hurt, but if other nations start following suit that could
eventually cause a financial avalanche.
What we are witnessing right now is just a turning point.
The effects won't be felt right away. So don't expect this to cause financial disaster next week or next
month.
But this is definitely another element in the "perfect storm" that is starting to brew for the U.S.
economy.
Yes, we have been living in a temporary bubble of false stability for a few years. However, the long-term
outlook has not gotten any better. In fact, the long-term trends that are destroying our economic and
financial foundations just continue to get even worse.
Who Needs The Cyber-Spying United States?

Russia and China have just signed what is being called "the gas deal of the century", and the two
countries are discussing moving away from the U.S. dollar and using their own currencies to trade with
one another. This has huge implications for the future of the U.S. economy, but the mainstream media
in the United States is being strangely quiet about all of this. For example, I searched CNN's website to
see if I could find something about this gas deal between Russia and China and I did not find
anything. But I did find links to "top stories" entitled "Celebs who went faux red" and "Adorable kid
tugs on Obama's ear". Is it any wonder why the mainstream media is dying? If a particular story does
not fit their agenda, they will simply ignore it. But the truth is that this new agreement between Russia
and China is huge. It could end up fundamentally changing the global financial system, and not in a way
that would be beneficial for the United States.
Russia and China had been negotiating this natural gas deal for ten years, and now it is finally
done. Russia is the largest exporter of natural gas on the entire planet, and China is poised to become
the world's largest economy in just a few years. This new $400 billion agreement means that these two
superpowers could potentially enjoy a mutually beneficial relationship for the next 30 years...
Russia reached a $400 billion deal to supply natural gas to China through a new pipeline over 30 years,
a milestone in relations between the worlds largest energy producer and the biggest consumer.
President Vladimir Putin is turning to China to bolster Russias economy as relations sour with the U.S.
and European Union because of the crisis in Ukraine. Todays accord, signed after more than a decade of
talks, will allow state-run gas producer OAO Gazprom (GAZP) to invest $55 billion developing giant gas
fields in eastern Siberia and building the pipeline, Putin said.
Its an epochal event, Putin said in Shanghai after the contract was signed. Both countries are satisfied
with the price, he said.
Of course countries sell oil and natural gas to each other all the time. But what makes this deal such a
potential problem for the U.S. is the fact that Russia and China are working on cutting the U.S. dollar out
of the entire equation. Just check out the following excerpt from a recent article in a Russian news
source...
Russia and China are planning to increase the volume of direct payments in mutual trade in their
national currencies, according to a joint statement on a new stage of comprehensive partnership and
strategic cooperation signed during high-level talks in Shanghai on Tuesday.
The sides intend to take new steps to increase the level and expansion of spheres of RussianChinese practical cooperation, in particular to establish close cooperation in the financial sphere,
including an increase in direct payments in the Russian and Chinese national currencies in trade,
investments and loan services, the statement said.
In the United States, our current standard of living is extremely dependent on the rest of the world
continuing to use our currency to trade with one another. If Russia starts selling natural gas to China
without the U.S. dollar being involved, that would be a monumental blow to the petrodollar. And if
other nations started following the lead of Russia and China, that could result in an avalanche from
which the petrodollar may never recover.
And it isn't just the national governments of Russia and China that are discussing moving away from the
U.S. dollar. For example, the second largest bank in Russia just signed a deal with the Bank of China "to
pay each other in domestic currencies"...
VTB, Russias second biggest lender, has signed a deal with Bank of China, which includes an agreement
to pay each other in domestic currencies.
Under the agreement, the banks plan to develop their partnership in a number of areas,
including cooperation on ruble and renminbi settlements, investment banking, inter-bank
lending, trade finance and capital-markets transactions, says the official VTB statement.
The deal underlines VTB Groups growing interest in Asian markets and will help grow trade between
Russia and China that are already close trading partners, said VTB Bank Management Board Vasily Titov.
You can almost feel the power of the U.S. dollar fading.
A few months ago, when I wrote about how China had announced that it no longer planned to stockpile
more U.S. dollars, I speculated that it may be evidence that China planned to start making a big move
away from the U.S. dollar.
And now China has apparently decided that there is not much gutting of our economy left to do and that
it is time to let the dollar collapse. As I mentioned above, China has announced that it is going to stop
stockpiling foreign-exchange reserves...
The Peoples Bank of China said the country does not benefit any more from increases in its
foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit
the yuans appreciation.
Its no longer in Chinas favor to accumulate foreign-exchange reserves, Yi Gang, a deputy
governor at the central bank, said in a speech organized by China Economists 50 Forum at
Tsinghua University yesterday. The monetary authority will basically end normal
intervention in the currency market and broaden the yuans daily trading range, Governor
Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week
following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.
It isn't going to happen overnight, but the value of the U.S. dollar is going to start to go down, and all of
that cheap stuff that you are used to buying at Wal-Mart and the dollar store is going to become a lot
more expensive.
The Chinese do not plan to allow the United States to indefinitely dominate the globe financially. In the
long run, the Chinese plan to be the ones calling the shots, and that means that the power of the U.S.
dollar must decline.
These days, instead of piling up mountains of U.S. currency, China has started accumulating hard assets
instead. In the past, I have written about how China is rapidly stockpiling gold, and it turns out that the
Chinese have also been very busy stockpiling oil as well...
China is stockpiling oil for its strategic petroleum reserve at a record pace, intervening on a scale large
enough to send a powerful pulse through the world crude market.
The move comes as tensions mount in the South China Sea and the West prepares possible oil sanctions
against Russia over the crisis in eastern Ukraine. Analysts believe China is quietly building up buffers
against a possible spike in oil prices or disruptions in supply.
The International Energy Agency (IEA) said in its latest monthly report that China imported 6.81m
barrels per day (bpd) in April, an all-time high.
Once upon a time, China was extremely dependent on the United States economically. The same was
true with most of the rest of the world.
But now economic power has shifted so dramatically that nations such as Russia and China are realizing
that they don't really need to be dependent on the United States any longer.
And with each passing year, the relationship between Russia and China is becoming stronger. As Pepe
Escobar recently observed, this emerging alliance is causing quite a bit of consternation in Washington...
And no wonder Washington is anxious. That alliance is already a done deal in a variety of ways: through
the BRICS group of emerging powers (Brazil, Russia, India, China, and South Africa); at the Shanghai
Cooperation Organization, the Asian counterweight to NATO; inside the G20; and via the 120-membernation Non-Aligned Movement (NAM). Trade and commerce are just part of the future bargain.
Synergies in the development of new military technologies beckon as well. After Russias Star Warsstyle, ultra-sophisticated S-500 air defense anti-missile system comes online in 2018, Beijing is sure to
want a version of it. Meanwhile, Russia is about to sell dozens of state-of-the-art Sukhoi Su-35 jet
fighters to the Chinese as Beijing and Moscow move to seal an aviation-industrial partnership.
Meanwhile, the relationship that the U.S. has with both nations is quickly going sour. The crisis in
Ukraine has caused relations with Russia to drop to the lowest point since the end of the Cold War, and
now China is deeply offended by charges that Chinese military officers have been involved in
cyberspying on the United States
China on Tuesday warned the United States was jeopardizing military ties by charging five Chinese
officers with cyberspying and tried to turn the tables on Washington by calling it "the biggest attacker of
China's cyberspace."
China announced it was suspending cooperation with the United States in a joint cybersecurity task
force over Monday's charges that officers stole trade secrets from major American companies. The
Foreign Ministry demanded Washington withdraw the indictment.
The testy exchange marked an escalation in tensions over U.S. complaints that China's military uses its
cyber warfare skills to steal foreign trade secrets to help the country's vast state-owned industrial
sector.
The divide between the East and the West is growing.
But the Obama administration has not figured out that we need the East more than they need us.
Right now, the number one U.S. export is U.S. dollars. Our massively inflated standard of living is very
heavily dependent on the rest of the world using our currency to trade with one another and lending it
to us at super low interest rates.
If the rest of the world quits playing our game, our debt-based financial system will quickly fall apart.
Unfortunately, nobody in the Obama administration seems to have much understanding of global
economics, and they will probably continue to antagonize Russia and China.
Contributor: M. Sneider
10
Some newly minted college graduates struggle to find work. Others accept jobs for which they feel
overqualified. Student debt, meanwhile, has topped $1 trillion.
Its enough to create a wave of questions about whether a college education is still worth it.
A new set of income statistics answers those questions quite clearly: Yes, college is worth it, and its not
even close. For all the struggles that many young college graduates face, a four-year degree has
probably never been more valuable.
The pay gap between college graduates and everyone else reached a record high last year, according to
the new data, which is based on an analysis of Labor Department statistics by the Economic Policy
Institute in Washington. Americans with four-year college degrees made 98 percent more an hour on
average in 2013 than people without a degree. Thats up from 89 percent five years earlier, 85 percent a
decade earlier and 64 percent in the early 1980s.
Rising Value of a College Degree

The pay of people with a four-year college degree has risen compared to that of those with a high school
degree but no college credit. The relative pay of people who attended college without earning a fouryear degree has stayed flat.
11
There is nothing inevitable about this trend. If there were more college graduates than the economy
needed, the pay gap would shrink. The gaps recent growth is especially notable because it has come
after a rise in the number of college graduates, partly because many people went back to school during
the Great Recession. That the pay gap has nonetheless continued growing means that were still not
producing enough of them.
We have too few college graduates, says David Autor, an M.I.T. economist, who was not involved in
the Economic Policy Institutes analysis. We also have too few people who are prepared for college.
Its important to emphasize these shortfalls because public discussion today for which we in the news
media deserve some responsibility often focuses on the undeniable fact that a bachelors degree
does not guarantee success. But of course it doesnt. Nothing guarantees success, especially after 15
years of disappointing economic growth and rising inequality.
When experts and journalists spend so much time talking about the limitations of education, they
almost certainly are discouraging some teenagers from going to college and some adults from going
back to earn degrees. (Those same experts and journalists are sending their own children to college and
often obsessing over which one.) The decision not to attend college for fear that its a bad deal is among
the most economically irrational decisions anybody could make in 2014.
The much-discussed cost of college doesnt change this fact. According to apaper by Mr. Autor published
Thursday in the journal Science, the true cost of a college degree is about negative $500,000. Thats
right: Over the long run, college is cheaper than free. Not going to college will cost you about half a
million dollars.
Mr. Autors paper building on work by the economists Christopher Avery and Sarah Turner arrives
at that figure first by calculating the very real cost of tuition and fees. This amount is then subtracted
from the lifetime gap between the earnings of college graduates and high school graduates. After
adjusting for inflation and the time value of money, the net cost of college is negative $500,000, roughly
double what it was three decades ago.
This calculation is necessarily imprecise, because it cant control for any pre-existing differences
between college graduates and non-graduates differences that would exist regardless of schooling.
Yet other research, comparing otherwise similar people who did and did not graduate from college, has
also found that education brings a huge return.
In a similar vein, the new Economic Policy Institute numbers show that the benefits of college dont go
just to graduates of elite colleges, who typically go on to to earn graduate degrees. The wage gap
between people with only a bachelors degree and people without such a degree has also kept rising.
Tellingly, though, the wage premium for people who have attended college without earning a bachelors
degree a group that includes community-college graduates has not been rising. The big economic
returns go to people with four-year degrees. Those returns underscore the importance of efforts to
reduce the college dropout rate, such as those at the University of Texas, which Paul Tough described in
a recent Times Magazine article.
12
But what about all those alarming stories you hear about indebted, jobless college graduates?
The anecdotes may be real, yet the conventional wisdom often exaggerates the problem. Among fouryear college graduates who took out loans, average debt is about $25,000, a sum that is a tiny fraction
of the economic benefits of college. (My own student debt, as it happens, was almost identical to this
figure, in inflation-adjusted terms.) And the unemployment rate in April for people between 25 and 34
years old with a bachelors degree was a mere 3 percent.
I find the data from the Economic Policy Institute especially telling because the institute a left-leaning
research group makes a point of arguing that education is not the solution to all of the economys
problems. That is important, too. College graduates, like almost everyone else, are suffering from the
economys weak growth and from the disproportionate share of this growth flowing to the very richest
households.
The average hourly wage for college graduates has risen only 1 percent over the last decade, to about
$32.60. The pay gap has grown mostly because the average wage for everyone else has fallen 5
percent, to about $16.50. To me, the picture is people in almost every kind of job not being able to see
their wages grow, Lawrence Mishel, the institutes president, told me. Wage growth essentially
stopped in 2002.
From the countrys perspective, education can be only part of the solution to our economic problems.
We also need to find other means for lifting living standards not to mention ways to provide good
jobs for people without college degrees.
But from almost any individuals perspective, college is a no-brainer. Its the most reliable ticket to the
middle class and beyond. Those who question the value of college tend to be those with the luxury of
knowing their own children will be able to attend it.
Not so many decades ago, high school was considered the frontier of education. Some people even
argued that it was a waste to encourage Americans from humble backgrounds to spend four years of life
attending high school. Today, obviously, the notion that everyone should attend 13 years of school is
indisputable.
But there is nothing magical about 13 years of education. As the economy becomes more
technologically complex, the amount of education that people need will rise. At some point, 15 years or
17 years of education will make more sense as a universal goal.
That point, in fact, has already arrived. See Addendum A
Contributor: David Leonhardt
13
14
Volume 20, Number 3 2014 www.newyorkfed.org/research/current_issues
IN ECONOMICS AND FINANCE
current issues
FEDERAL RESERVE BANK OF NEW YORK
Do the Benefits of College Still Outweigh

the Costs?
Jaison R. Abel and Richard Deitz
In recent years, students have been paying more to attend
college and earning less upon graduationtrends that have
led many observers to question whether a college education
remains a good investment. However, an analysis of the
economic returns to college since the 1970s demonstrates that
the benefits of both a bachelors degree and an associates degree
still tend to outweigh the costs, with both degrees earning a
return of about 15 percent over the past decade. The return has
remained high in spite of rising tuition and falling earnings
because the wages of those without a college degree have also
been falling, keeping the college wage premium near an all-time
high while reducing the opportunity cost of going to school.
he sluggish labor market recovery from the Great Recession has refueled
the debate about the value of a college degree. Although the unemployment
rate of college-educated workers has remained well below average, there is
mounting evidence that recent college graduates are struggling to find good jobs.1
At the same time, college tuition has risen sharply, reaching record highs, and college graduates are increasingly finding themselves saddled with debt from student
loans used to finance their education. By the end of 2013, aggregate student loan
debt in the United States exceeded $1 trillion, and more than 11percent of student
loan balances were either severely delinquent or already in default.2 With the costs
of college rising and the benefits in doubt, many are wondering whether earning a
college degree still pays.
In this edition of Current Issues, we examine the costs, benefits, and economic return of a college education. By analyzing more than four decades of
data, we are able to put the recent experience of college graduatesthose with
either a bachelors degree or an associates degreeinto historical perspective.
Our analysis reveals that the average wages of college graduates have been falling for the better part of a decade, with the pace of decline accelerating after the
Great Recession. Further, we show that tuition has increased sharply over time,
although average costs are typically much lower than the published sticker
price would suggest because of the wide availability of student aid and tax
benefits. Nonetheless, while it might seem as if the value of a college degree has
declined because of falling wages and rising tuition, we show that this is actually not the case. Instead, after climbing impressively between 1980 and 2000,
the return to a college degree has held steady for more than a decade at around
1 See Abel, Deitz, and Su (2014).
2 See Federal Reserve Bank of New York (2014).
CURRENTISSUESINECONOMICSANDFINANCE Volume 20, Number 3
15percent, easily surpassing the threshold for a sound

investment. The driving force behind this seeming contradiction is that the wages of those without a college degree have
also been falling, keeping the college wage premium near an
all-time high while reducing the opportunity cost of going to
school. Indeed, while the past decade has been a challenging
time for college graduates, those with less education have
struggled even more.
Finally, we investigate whether the return on a bachelors
degree varies with students areas of specialization. Perhaps
not surprisingly, we find that the return differs markedly
across college majors. In particular, students majoring in fields
that provide technical training, such as engineering or math
and computers, or fields geared toward growing parts of the
economy, such as health care, have tended to earn high returns
on their educational investments. By contrast, many students
majoring in fields such as leisure and hospitality, agriculture,
architecture, or the liberal arts have tended to fare worse, particularly if they find themselves chronically underemployed.
Thus, while the benefits of college still outweigh the costs on
average, not all college degrees are an equally good investment.
Economic Benefits of College
The economic benefits of a college degree can be thought of

as the extra wages one can earn with a college degree relative
to what one would earn without one. We measure this wage
differential by comparing the average wages earned by college graduates with the average wages earned by high school
graduates. The wage differentials we estimate provide only a
rough guide to the economic benefits of a college degree, and
come with a few important caveats. First, as a group, those
pursuing a college degree may well have aptitudes, skills, and
other characteristics that make them different from those
who do not go on to college. This implies that part of what
we estimate as a benefit to a college degree may reflect the
different abilities of those who earn a college degree, and not
the added value of a college education itself. Furthermore,
our analysis is based on the historical earnings of college
and high school graduates who entered the labor market at
different points in time, and there is no guarantee that these
earnings patterns will hold in the future. Finally, the results
we present are average outcomes. Thus, by definition, some
individuals will have better or worse outcomes than our
estimates suggest.
We utilize data from the March supplement of the Current Population Survey to calculate average annual wages
between 1970 and 2013 for three groups of workers: those
with only a high school diploma (including workers who
earned a GED), those with only an associates degree, and
those with only a bachelors degree.3 We exclude those
Chart 1
Average Annual Wages, by Education

1970-2013
Thousands of dollars
80
70
Bachelors degree
60
Associates degree
50
40
High school diploma
30
20
10
0
1970
75
80
85
95
00
05
10 13
Sources: U.S. Census Bureau and U.S. Bureau of Labor Statistics, Current
Population Survey, March Supplement; U.S. Bureau of Labor Statistics, consumer
price index.
Notes: Dollar figures are expressed in constant 2013 dollars. Wages are adjusted
to control for differences in worker characteristics. The shaded areas indicate
periods designated recessions by the National Bureau of Economic Research.
with a graduate degree from our analysis in order to focus

on the return to a bachelors degree in and of itself. However, it is important to note that those with a postgraduate
education tend to earn more than those with only a bachelors degree, so part of the payoff to a bachelors degree
is its utility as a stepping stone to a postgraduate degree.4
These gains are not captured in our analysis.
To obtain comparable wage estimates for workers in each
education group, we restrict our sample to full-time workers
aged sixteen to sixty-four. Thus, our analysis excludes those
who are unemployed or are working part-time. This restriction
tends to understate the wage benefits of a college degree since
those with only a high school education are more likely to be
unemployed or to work part-time than those with a college
degree, and this gap has widened over time.5 We use regression
models to control for differences in observable characteristics of
people over time and across education groups, and express all
figures in constant 2013 dollars using the consumer price index
to adjust for inflation (see Box). In essence, these restrictions
and adjustments allow us to calculate wages for the average
worker within each group that are comparable over time.
The College Wage Premium

As one might expect, average wages for those with a college degree
are far greater than average wages for those with only a high
school diploma (Chart1). In the period between 1970 and
2013 as a whole, those with a bachelors degree earned about
4 See Lindley and Machin (2013).
3 See Ruggles et al. (2010).
90
Estimating Average Wages Using a Fixed

Composition Approach
We use a linear regression model to estimate average wages that
control for differences in observable characteristics of workers
between education groups and over time. Specifically, for each
individual i, we estimate the following wage equation separately
for each education group and year:
wi= Xi + i ,
where w
iis an individuals annual wages; X
iis a vector of
individual-level characteristics, including age, age-squared, race,
marital status, gender, and the U.S. Census division in which each
individual is located; is a vector of corresponding parameter
estimates; and iis a standard error term. With three education groups and forty-four years of data, we estimate this model
132times using cross-sectional microdata on individual workers.
To estimate the average wages shown in Chart1, we evaluate
the regression model using the 2013 mean value of each independent variable to obtain a fitted wage value for each education
group and year. The means of all independent variables are calculated using the combined sample of all workers for the year 2013.
Thus, the average wage values we estimate are driven by variation
in the estimated coefficients over time. Fixing the average workers
characteristics to 2013 values allows us to take the characteristics
of todays workforce and recast prior years to fit these same demographics. For example, the labor market experience of women
differs in various ways from that of men. With the rise in female
labor force participation over the past few decades, womens share
of the workforce is higher today than it was in 1970. Our approach
allows us to account for this difference by using the share of
women in the workforce today to estimate average wages in prior
years when the demographics were different.
We also use the results from these equations to estimate
lifetime earnings profiles for each education group and year, as
depicted in Chart2 for the year 2013. Here, we use the results
obtained from the regression equations, again holding the independent variables constant at their 2013 mean values, with the
exception of age and age-squared. We then substitute age values
to predict the average wage of each type of worker at each age of
their working life. Since our data are cross-sectional, we do not
follow individuals over time to see how their earnings change;
rather, we observe what people of various ages earn in a given
year. Thus, the lifetime earnings profiles we estimate rely on the
wage outcomes of people at different ages in a particular year
to predict what one could expect to earn during a lifetime. For
example, the 1990 lifetime earnings profile yields an estimate of
the average wage a person with a certain level of education might
expect to earn at age twenty, thirty, forty, and fifty, based on what
twenty-, thirty-, forty- and fifty-year-old workers with that same
level of education typically earned in thatsame year.
$64,500 per year and those with an associates degree earned

about $50,000 per year, while those with a high school
diploma earned only $41,000 per year. Thus, over the past
four decades, those with a bachelors degree have tended to
earn 56percent more than high school graduates while those
with an associates degree have tended to earn 21percent
more than high school graduates.6 However, these wage
premiums have fluctuated over time.
Average Wages over Time

Perhaps somewhat surprisingly, the average wage of workers with a bachelors degree does not always risein fact, it
spent as much time declining as increasing during the past
four decades. Consider first the 1970s. Although wages drifted
down for all workers between 1970 and 1982, those with a
bachelors degree saw their wages decline the fastest. Average
wages for this group fell from a little more than $60,000 to
about $56,000, or 8percentnearly double the rate of decline
in wages for those with either an associates degree or a high
school diploma. In fact, the falling wages of workers with a
bachelors degree during the 1970s raised concerns that the
large number of people going to college had produced an
overeducated workforce.7 However, circumstances changed
dramatically in the early 1980s.
The wages of college graduates increased sharply in both
absolute and relative terms beginning in the early 1980s and
continuing through the 1990s. In many ways, these may well
have been the golden years for college graduates. As technological advancement and the computer revolution took hold,
the demand for skilled workers steepened. Indeed, although
college enrollment grew steadily during this time, the demand
for college-educated workers increased even more.8 Further,
the introduction of new technologies helped college graduates
become more productive.9 These forces combined to push
wages up rapidly for college graduates. Between 1982 and
2001, the average wage earned by workers with a bachelors
degree jumped 31percent and the average wage for those
with an associates degree rose 12percent, while the average
wage for a high school graduate was essentially unchanged.
As a result, the wage premium earned by those with a college
degree doubled over this period, reaching nearly 80percent
for workers with a bachelors degree and almost 30percent for
those with an associates degree.
Since then, however, it has been a challenging time for all
workers, and the prospects of college graduates have once
6 Although wage dispersion has increased over time for all three education
groups, the college wage premium measured at the 25th, 50th, and
75thpercentiles is nearly identical to the college wage premium measured at
the means for the entire 1970-2013 time period.
7 See Freeman (1976).
8 See Goldin and Katz (2008).
9 See Autor, Levy, and Murnane (2003).
www.newyorkfed.org/research/current_issues
Life-Cycle Wage Profiles, by Education
well over $1million more than high school graduates during

their working lives, while those with an associates degree earn
about $325,000 more.11
90
80
Economic Costs of College
Chart 2
2013
Bachelors degree
70
60
Associates degree
50
40
High school diploma
30
20
10
0
18 20
25
30
35
40
Age
45
50
55
60
64
Source: U.S. Census Bureau and U.S. Bureau of Labor Statistics, Current
Population Survey, March Supplement.
Note: Wages are adjusted to control for differences in worker characteristics.
again come into question. Between 2001 and 2013, the average
wage of workers with a bachelors degree declined 10.3percent, and the average wage of those with an associates degree
declined 11.1percent; for high school graduates, the average wage dropped a more modest 7.6percent. It is not clear
whether this trend is a consequence of the two recessions and
jobless recoveries that came in close succession beginning
in the 2000s, or a more permanent reversal in the demand
for the skills of college graduates.10 However, even with the
recent decline in wages, those with a bachelors degree have, on
average, continued to enjoy a 75percent wage premium, while
those with an associates degree still earn over 20percent more
than high school graduates. As we explain in detail later, these
wage differentials are a critical component in determining
whether a college degree remains a good investment.
Lifetime Earnings
Significantly, the economic benefits associated with earning
a college degree last over an entire lifetime. Chart2 shows the
life-cycle wage profiles for each education group using 2013
data. These wage profiles can be used to estimate expected
lifetime earnings by adding up the wages a worker typically
earns over his or her career (see Box). For simplicity, we assume
that all workers retire at age sixty-five and that those who, as
students, pursued a college degree followed the traditional fulltime pathtaking two years to complete an associates degree
or four years to complete a bachelors degreeand did not earn
wages while enrolled in school. Despite entering the labor force
at a later age, workers with a bachelors degree on average earn
10 See Beaudry, Green, and Sand (2013).
As with all investments, a college education requires paying

some upfront costs in order to capture the expected benefits
that accrue over the lifetime of the investment. In this section,
we estimate these costs for the typical college student. We
measure two components of the costs associated with obtaining a college education. The first is direct costs, which include
the out-of-pocket expenses associated with attending college
that would not otherwise be incurred. Tuition is the clearest example of a direct cost. By contrast, room and board
another large expense commonly associated with attending
collegeneeds to be paid regardless of whether someone
decides to go to college, so it is not considered a direct cost
of college from an economic perspective. The second type of
cost is an opportunity cost, which represents the value of what
someone must give up to attend college. For most people, the
opportunity cost of a college education is equivalent to the
wages that could have been earned by working instead of going
to college.
Direct Costs
To measure the direct costs of college, we rely on information
from the College Board and the U.S. Department of Education.
These sources provide data on the average tuition and fees paid
by undergraduate students at two-year institutions, which primarily produce associates degrees, and four-year institutions,
which primarily produce bachelors degrees. While published
tuition and fees represent the sticker price for attending college, many students, if not most, do not actually pay this price.
Because of the many forms of financial aid students receive,
including grants from the institutions themselves, the actual
prices students pay may differ significantly from these figures.
Using data on the various forms of aid students receive, we
compute the average net tuition cost, which subtracts funds
students receive that need not be paid back, including grants,
tuition concessions, and tax benefits. Thus, net tuition is more
representative of the out-of-pocket expenses paid by the
average student.
Chart3 shows the trend in published and net tuition for the
average student over time, adjusted for inflation and expressed
11 College graduates entering the labor market during recessions start their
careers earning less than those who enter in better times, and this wage
penalty can carry forward throughout their working lives (Kahn 2010).
Because the wage profiles we estimate rely on a cross-section of workers who
started their careers at different points in the business cycle, it is possible that
the lifetime earnings of those graduating during the Great Recession may not
be as high as our estimates suggest.
Chart 3
Chart 4
Annual Published and Net Tuition for Bachelors

and Associates Degrees
Total Cost of a College Degree

1970-2013
1970-2013
160
Bachelors Degree: Four-Year Cost
140
16
14
12
Total cost
120
Bachelors tuition
10
Tuition cost
100
80
Bachelors net price
6
4
Associates tuition
40
Associates net price
0
-2
1970
Opportunity cost
60
20
75
80
85
90
95
00
05
10
13
Sources: U.S. Bureau of Labor Statistics, consumer price index; U.S. Department
of Education, Digest of Education Statistics 2012; The College Board, Trends in
College Pricing 2013 and Trends in Student Aid 2013.
Notes: Net tuition is published tuition minus the grants, tuition concessions, and
tax benefits given to students. Dollar figures are expressed in constant 2013
dollars. The shaded areas indicate periods designated recessions by the National
Bureau of Economic Research.
0
70
Associates Degree: Two-Year Cost
60
50
Tuition cost
Total cost
40
30
in constant 2013 dollars. For bachelors degrees, net tuition has

held at around half of the sticker price. In 2013, the average
sticker price was about $14,750, while the net price was just
$6,550. Although published tuition for an associates degree
has ranged between $1,000 and $3,000, net tuition has hovered
around zero, and in fact has been negative in recent years. This
means that the actual cost of an associates degree was more
than fully subsidized by various tax benefits and other forms of
aid. For example, on average, a student pursuing an associates
degree in 2013 received about $4,300 in student aid and tax
benefits, which was more than enough to cover the average
published tuition of just over $3,000.
As for how much these costs have changed over time, the
sticker price of a bachelors degree has increased sharply, more
than tripling from about $4,600 per year in the 1970s to nearly
$15,000 per year in 2013. Net tuition rose at a similar pace,
from around $2,300 per year in the 1970s to about $6,500 per
year in 2013. Similarly, the sticker price of an associates degree
nearly tripled from roughly $1,100 per year in the 1970s to
more than $3,000 per year in 2013, while the net price fell
below zero. All in all, although the sticker price of college has
risen to a high level, the amount actually paid out-of-pocket
remains much lower than what the sticker price suggests.
Opportunity Costs
While the high and rising costs of college tuition receive considerable attention, out-of-pocket expenses prove to be only a
Opportunity cost
20
10
0
1970
75
80
85
90
95
00
05
10
13
Population Survey, March Supplement; U.S. Bureau of Labor Statistics, consumer
price index; U.S. Department of Education, Digest of Education Statistics 2012; The
College Board, Trends in College Pricing 2013 and Trends in Student Aid 2013.
Note: Dollar figures are expressed in constant 2013 dollars. For associates degree
figures, net tuition costs are negative when opportunity costs exceed total costs.
small part of the total cost of college once opportunity costs are
considered. As explained earlier, attending college on a fulltime basis often requires delaying entry into the labor market
and forgoing wages that would be available to those with a
high school education. Thus, the average wages earned by a
high school graduate during his or her first two or four years of
employment provide a good proxy for the opportunity cost of
college. Our 2013 life-cycle wage estimates indicate that someone pursuing a bachelors degree would forgo almost $96,000
in wagesnearly four times more than net tuition costs. Similarly, we estimate that someone pursuing an associates degree
would forgo almost $46,000 in wages. Thus, with the subsidies
available for someone pursuing an associates degree, forgone
earnings during the two years it typically requires to complete
such a degree are the only true economic cost incurred.
Total Costs
We now put the pieces together, adding direct costs and opportunity costs to estimate the total costs of a bachelors degree
and an associates degree over time (Chart4). As an example,
we first look at total costs for the year 2013when net tuition
for a bachelors degree was at its highest point. We estimate
that over the four years typically required to earn a bachelors
degree, a student would have paid about $26,000 in tuition and
fees and would have forgone nearly $96,000 in wages. Thus, the
total economic cost of a bachelors degree was about $122,000
(top panel). For an associates degree, total costs amounted to
roughly $43,700 in 2013 (bottom panel). As the Chartmakes
clear, forgone wages have represented the vast majority of the
total costs of college for more than four decades.
Looking at the change in total costs over time, we see that
the cost of a bachelors degree held fairly steady from the mid1970s up through the mid-1990s, then rose until the early
2000s before falling again shortly after the Great Recession. For
the 1970-90 period, tuition costs were rising, but the increase
was offset by falling opportunity costs as the wages of high
school graduates declined. During the mid-1990s, opportunity
costs began to rise as the wages of high school graduates, and
everyone else, climbed with the robust economic expansion of
the period. During the first decade of the 2000s, while tuition
costs continued to rise, opportunity costs held steady, resulting in little change in total costs. Between 2010 and 2013, total
costs fell, largely reflecting the decline in wages for high school
graduates. Overall, despite the steady rise in tuition, the total
cost of a bachelors degree has not changed that significantly
over the past several decades, ranging between $110,000 and
$130,000 (top panel). The total cost of an associates degree,
while much lower than the cost of a bachelors degree, followed
a similar pattern, remaining in the $40,000 to $60,000 range
over the same period (bottom panel).
The Return to College
We now put together the full set of costs and benefits to calculate
the return to completing a college degree. To do so, we use the
internal rate of return, a formula that investors use to calculate
the economic value of different kinds of investments.12 Essentially, this calculation weighs the costs against the benefits of an
investment, in this case a college degree, and accounts for the
fact that both the costs and benefits accrue over time.
Our rate of return calculations assume that the costs of
college are incurred fully during the years in which people
are enrolled in school (two years for an associates degree,
four years for a bachelors degree), and that students forgo
Chart 5
Return to Bachelors and Associates Degrees

1970-2013
Percent
20
Associates degree
15
10
Bachelors degree
5
0
1970
75
80
85
90
95
00
05
10
Population Survey, March Supplement; U.S. Department of Education, Digest of
Education Statistics 2012; The College Board, Trends in College Pricing 2013 and
Trends in Student Aid 2013.
Note: The shaded areas indicate periods designated recessions by the National
Bureau of Economic Research.
employment while they are pursuing their education.13 Once

students graduate from college, the benefits are counted as
the extra wages they would earn relative to those with only a
high school diploma, received each year until retirement at
age sixty-five.14 In general, it is only worth undertaking an
investment if its rate of return exceeds a predetermined thresholdfor example, the cost of capital or the return that could
be earned on an alternative investmentbut investments with
higher rates of return are always more profitable than those
with lower rates of return.
Before presenting the results of this analysis, we again
emphasize that our rate of return estimates are meant to provide
only a rough guide to the value of a college degree. Significantly,
our rate of return estimates pertain to those who complete a
college degree; the estimates do not account for the risks associated with not completing the degree and dropping out of college.
Indeed, while college dropouts incur at least some of the costs
associated with going to college, they enjoy far fewer benefits.
Thus, incorporating dropout risk into our analysis would reduce
the estimated return to college, particularly for those who are
most likely to have difficulty completing their degree.15 Finally,
it bears repeating that the results we present are based on
13 In exchange for paying interest, people can take out student loans to delay
paying their college expenses. Thus, it is not necessary to incorporate such

financing options into our rate of return analysis. In fact, because interest rates
on student loans are often subsidized at below-market rates, student loans
generally allow people to earn higher returns than our results would indicate.
14 To the extent that some people continue to work beyond the conventional
12 Specifically, the internal rate of return is the discount rate that makes the net
present value of all cash flows from a particular investment equal to zero.
13
retirement age, our analysis understates the true economic return to college.
15 See Castex (2011).
historical wages and costs, and are meant to characterize average

outcomessome individuals who obtain a college degree will
have better or worse outcomes than our estimates suggest.
The Return to College over Time

The return to college increased sharply until the 2001 recession and has generally held at a high level since then (Chart5).
The return to a bachelors degree averaged about 9percent
during the 1970s, and then nearly doubled to about 16percent
by 2001, and has remained at around 14 to 15percent for the
past decade. The return to an associates degree increased from
about 6percent in the early 1970s to more than 16percent in
the second half of the 1990s, and, except for a few years, has
generally ranged between 13 and 15percent since then. These
results indicate that the rate of return to an associates degree
has been fairly close to the return for a bachelors degree since
around 1980. However, this finding largely reflects the much
lower cost of an associates degree. As shown in Chart2, those
with a bachelors degree still tend to earn significantly more
over their lifetime than those with only an associates degree.
These rates of return indicate that, for the average student,
a college degree remains a good investment. To put these
findings in perspective, consider that investing in stocks has
yielded an annual return of 7percent and investing in bonds
an annual return of 3percent since 1950.16 These figures can
serve as thresholds for evaluating whether college is a sound
investment. A return of at least 7percent is clearly a good
investment because it exceeds the historical return on stocks;
a return below 3percent would be a poor investment since
one could do better by investing in bonds. The return to each
type of college degree remains well above 7percent, despite
the fact that returns have not grown in more than a decade. In
fact, what might be most surprising is that the return to college
climbed for as long as it did.
Does Your Major Matter?

Investing in a college degree appears, on average, to be a wise
decision, but are all college degrees equally good investments?
To address this question, we turn to newly available data from
the 2012 American Community Survey that allows us to identify
the undergraduate majors of those with a bachelors degree.17
These data on college majors are relatively new, and so we focus
on estimating a rate of return for 2012 only. Parallel information
is not available for those with an associates degree. We classify
bachelors degrees into one of thirteen different majors, and utilize this information to estimate composition-adjusted life-cycle
wage profiles for each major. We then combine this information
Return to Bachelors Degree, by Major

2012
College Graduates
Overall
(Percent)
Total, all majors
15
Engineering
21
Math and computers
18
Health
18
Business
17
Communications
15
Technologies
15
Social sciences
15
Sciences
14
Architecture
14
Liberal arts
12
Agriculture and natural resources
11
Leisure and hospitality
11
Education
9
Underemployed
College Graduates
(Percent)
12
17
14
13
14
13
12
12
12
8
9
9
9
7
Sources: U.S. Census Bureau, American Community Survey; U.S. Department of

Labor, O*NET; U.S. Department of Education, Digest of Education Statistics 2012;
The College Board, Trends in College Pricing 2013 and Trends in Student Aid 2013.
with our estimates of the total cost of college to determine the

rate of return for each major.18
In presenting our findings, we emphasize that not all majors
are feasible for every college student. For example, recent
research has shown that graduating with a math or science
major is more difficult than pursuing other fields of study.19
Thus, some of the economic return associated with particular
majors may reflect differences in the abilities of the students
who choose these majors, and not necessarily the skills
obtained through majoring in these fields.20
We find that the return to college varies considerably across
majors, as shown in the first column of the table above. In
general, majors providing technical trainingthat is, training
that focuses on quantitative and analytical skillsearned the
highest return; engineering majors and math and computer
majors are cases in point, with rates of return of 21percent
and 18percent, respectively. Health majors also earned an
above-average return; the growth of this sector in recent years
has likely increased the demand for health care workers and
consequently boosted their wages. Business majors also rank
relatively high. At the other end of the spectrum, those majoring in the liberal arts, agriculture and natural resources, leisure
18 In general, college students pay the same tuition regardless of their major,
16 See Greenstone and Looney (2011). Using a similar approach, these authors
estimate a 15percent return to a bachelors degree and a 20percent return to

an associates degree in 2010.
17 See Ruggles et al. (2010).
though some higher education institutions have recently experimented with

differential pricing by instructional program. See Stange (2013).
19 See Stinebrickner and Stinebrickner (2013).
20 See Arcidiacono (2004) and Zafar (2011).
and hospitality, and education all have below-average returns.

For education majors, the relatively low rate of return in part
reflects the lower wages of teachers, who typically work less
than a full year and receive generous nonwage benefits, such
as pensions. Moreover, the relatively low returns for this major
may also reflect the fact that we do not capture teachers with a
masters degree, a common job requirement, and instead may
over-represent education majors outside of the teaching occupation. Nonetheless, regardless of major, the return to college
remains a good investment, on average, because each major
has a rate of return exceeding 9percent.
What about the Chronically Underemployed?

Recent research has shown that college graduates with a
bachelors degree are increasingly finding themselves underemployedthat is, working in a job that does not typically
require their degree.21 For these graduates, was the pursuit of a
bachelors degree a wise investment? To be sure, college graduates who find themselves underemployed upon graduation are
unlikely to remain underemployed for their entire working
life. Indeed, our own research suggests that the likelihood of
being underemployed declines significantly with age, and that
most college graduates work their way into college-level jobs
by the time they reach their thirties. Nonetheless, about a third
of those who obtain a college degree do spend much of their
careers in jobs that typically do not require a bachelors degree.
To analyze the benefits of a college education for this last
group, we calculate the rate of return for the scenario of college
graduates who remain underemployed over their entire working lives. To identify underemployed college graduates, we
utilize data from the U.S. Department of Labors Occupational
Information Network (O*NET). O*NET contains information on job-related requirements for hundreds of occupations,
collected from interviews of incumbent workers and with
input from professional occupational analysts. We use the
following question from the O*NET Education and Training
Questionnaire to determine whether an occupation requires a
college degree: If someone were being hired to perform this
job, indicate the level of education that would be required. We
consider a college education to be a requirement for a given
occupation if at least 50percent of the respondents working in
that occupation indicate that a bachelors degree is necessary to
perform the job. We then merge these data on the educational
requirements for each occupation with data on the actual
occupation in which a worker is employed. A college graduate is considered underemployed if he or she is working in an
occupation that does not typically require a bachelors degree.
We follow the steps described previously to estimate a
rate of return, but we estimate new age-earnings profiles for
the subset of college graduates who are underemployed. This
allows us to simulate lifetime earnings for the average worker

who remains underemployed throughout his or her entire
career. The benefit for these underemployed workers is measured as the extra wages they earn beyond the wages of a high
school graduate, while costs remain the same as estimated previously. Further, we extend our analysis to estimate the return
to college for underemployed workers with different majors.
Even for the chronically underemployed, it turns out that the
benefits of college still tend to outweigh the costs for the average
worker regardless of major (Table 1). While people in these noncollege jobs receive lower returns than their counterparts working in jobs that require a bachelors degree, they still tend to earn
a relatively high positive return, with the lowest being 7percent
for education majors. These findings indicate that employers are
willing to pay a premium for college graduates relative to those
with just a high school diploma, even in jobs that are not typically considered college-level positions.
Conclusion
With tuition rising, wages falling, and many college graduates struggling to find good jobs, the value of a college degree
may seem to be in doubt. However, these factors alone do not
determine whether a college education is a good investment.
Indeed, once the full set of costs and benefits is taken into
account, investing in a college education still appears to be a
wise economic decision for the average person.
Why is this the case? The answer lies in the declining fortunes
of those without a college degreea key consideration in
assessing the economic costs and benefits of obtaining a college
degree. On the benefit side, although the wages of collegeeducated workers have stagnated since the early 2000sand
even declined in the years since the Great Recessionthe wages
of high school graduates have also been falling. As a result, the
college wage premium has remained near its all-time high. On
the cost side, rising college tuition has largely been offset by the
declining opportunity cost of attending school, which, again, is
driven by the falling wages of high school graduates.
When we put all the pieces together, the good news for
college graduates is that the return to college remains high on
average, regardless of ones college major. However, the bad
news is that college students are paying more to go to school and
are earning less upon graduation. At this point, it is not clear
whether these trends will continue. Indeed, an important caveat
about our analysis is that it is based on the historical earnings of
college and high school graduates who entered the labor market
at different points in time, and we have no guarantee that these
earnings patterns will hold in the future. Nonetheless, despite
the recent struggles of college graduates, investing in a college
degree may be more important than ever before because those
who fail to do so are falling further and further behind.
References
Abel, Jaison R., Richard Deitz, and Yaqin Su. 2014. Are Recent College
Graduates Finding Good Jobs? Federal Reserve Bank of New York Current
Issues in Economics and Finance 20, no. 1: 1-8.
Arcidiacono, Peter. 2004. Ability Sorting and the Returns to College Major.
Journal of Econometrics 121: 343-73.
Autor, David H., Frank Levy, and Richard J. Murnane. 2003. The Skill Content of Recent Technological Change: An Empirical Exploration. Quarterly
Journal of Economics 118: 1279-1334.
Baum, Sandy, and Jennifer Ma. 2013. Trends in College Pricing. The College
Board.
Baum, Sandy, and Kathleen Payea. 2013. Trends in Student Aid. The College
Board.
Beaudry, Paul, David A. Green, and Benjamin M. Sand. 2013. The Great
Reversal in the Demand for Skill and Cognitive Tasks. NBER Working Paper
no. 18901, March.
Castex, Gonzalo. 2011. College Risk and Return. Central Bank of Chile
Working Paper no. 606, January.
Federal Reserve Bank of New York. 2014. Quarterly Report on Household Debt
and Credit, 2013:Q4, February.
Greenstone, Michael, and Adam Looney. 2011. Where Is the Best Place to
Invest $102,000In Stocks, Bonds, or a College Degree? BrookingsThe
Hamilton Project Paper, June 25.
Goldin, Claudia, and Lawrence F. Katz. 2008. The Race between Education and
Technology. Cambridge, Mass.: Harvard University Press.
Kahn, Lisa B. 2010. The Long-Term Labor Market Consequences of Graduating from College in a Bad Economy. Labour Economics 17: 303-16.
Lindley, Joanne, and Stephen Machin. 2013. The Rising Postgraduate Wage
Premium. Unpublished paper, October.
Ruggles, Steven J., Trent Alexander, Katie Genadek, Ronald Goeken,
MatthewB. Schroeder, and Matthew Sobek. 2010. Integrated Public Use
Microdata Series: Version 5.0 [machine-readable database]. Minneapolis:
University of Minnesota.
Stange, Kevin M. 2013. Differential Pricing in Undergraduate Education:
Effects on Degree Production by Field. NBER Working Paper no. 19183, June.
Stinebrickner, Ralph, and Todd R. Stinebrickner. 2013. A Major in Science?
Initial Beliefs and Final Outcomes for College Major and Dropout. NBER
Working Paper no. 19165, June.
Zafar, Basit. 2011. How Do College Students Form Expectations? Journal of
Labor Economics 29: 301-48.
Freeman, Richard B. 1976. The Overeducated American. San Diego, Calif.:

Academic Press.
ABOUT THE AUTHORS

Jaison R. Abel is a senior economist and Richard Deitz an assistant vice president in the Regional Analysis Function of the Federal
Reserve Bank of New Yorks Research and Statistics Group.
The content co-editor of this article is Basit Zafar.
Current Issues in Economics and Finance is published by the Research and Statistics Group of the Federal Reserve Bank of New York.
Michael Fleming and Thomas Klitgaard are the editors of the series.
Editorial Staff: Valerie LaPorte, Michelle Bailer, Karen Carter, Anna Snider
Production: Theresa Izzillo, Jane Urry, Jessica Iannuzzi, David Rosenberg
Back issues of Current Issues are available at http://www.newyorkfed.org/research/current_issues/.
The views expressed in this article are those of the authors and do not necessarily reflect the position
of the Federal Reserve Bank of New York or the Federal Reserve System.
A body of research in positive psychology suggests that optimism has a number of benefits: social,
psychological and physical (Schneider, Gruman, & Coutts, 2011). Optimism has been correlated with
improved mental and physical health, better work and educational outcomes, and richer social
relationships.
While optimism appears to be a healthy orientation, things are not quite so simple. Some researchers
identify two classes of optimism: realistic and unrealistic (Weinstein, 1980). Unrealistic optimists are at
risk for self-deception, especially in domains such as risk assessment (Collingwood, n.d.). Realistic
optimists, on the other hand, more successfully incorporate data about situations and events, balancing
the best of optimistic and pessimistic perspectives. The realistic optimist point of view could be summed
up by the adage: "hope for the best, prepare for the worst".
15
To make matters more complex, the idea of optimism and pessimism as dispositional attributes is giving
way to a more nuanced view of these constructs (Paul, 2011). Neither perspective is inherently "good"
or "bad", both can be adopted as needed, both may be considered highly functional depending on the
situational context.
In some situations, "defensive pessimism" can be a powerful motivator to make better choices. For
example, being pessimistic about the economy may be a motivator to avoid debt and manage your
money more effectively.
Personally, I've always considered myself something of a realist.
On a scale of half-empty to half-full, most of the time I think "oh, there's a glass with some water in it,
let's measure it".
In some contexts, I'm more optimistic (e.g., if I'm working on this newsletter and I have a sufficient
degree of control over it, I'm usually reasonably optimistic that it will succeed), in other contexts, I'm
less optimistic (e.g., if I'm out fishing on a Sunday morning, and the tides are all wrong and I'm out of
bait, I'm reasonably pessimistic about bringing home dinner).
InsidersPower
I believe socionomics, social mood, and capital flows drive economies in cycles globally. Because of the
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all countries are now highly correlated.
This InsidersPower Newsletter is a compilation of current economic articles written, not by us, but by
global authors within the last 90 days. They represent the current global social mood and creates a
global Point of View that has, by the way, been extremely accurate from ancient Greece and Rome to
our own current society.
It represents current economic reality on a global scale whether its positive or negative. Ultimately,
through the Current Investment Guideline found at the bottom of the Wealth Preserver subscribers
page. It delivers the opportunity of an optimistic, positive and profitable outcome for you.
Based on the criteria already outlined, I believe InsidersPower to be an extremely REALISTIC newsletter
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if they agree!
16
In 1986, Livio S. Nespoli wrote is first Investment Book called Invest with
History. In it, he revealed how an investor could use historical precedent
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direction of the markets, sometimes decades in advance.
Since then, Livio had delivered countless seminars to thousands of
professional and amateur investors teaching them how to accurately
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international national attention for his warning investors of the 2000 peak
and 2008 stock market collapse months before they happened. But this was not the first time he was on the
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to be consistent, predictable and measurable.
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Russia Is Doing It Russia Is Actually Abandoning The Dollar

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Rising Value of a College Degree

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Volume 20, Number 3 2014 www.newyorkfed.org/research/current_issues

IN ECONOMICS AND FINANCE

Do the Benefits of College Still Outweigh

CURRENTISSUESINECONOMICSANDFINANCE Volume 20, Number 3

15percent, easily surpassing the threshold for a sound

Economic Benefits of College

The economic benefits of a college degree can be thought of

Average Annual Wages, by Education

High school diploma

with a graduate degree from our analysis in order to focus

The College Wage Premium

3 See Ruggles et al. (2010).

5 See Abel, Deitz, and Su (2014).

Estimating Average Wages Using a Fixed

$64,500 per year and those with an associates degree earned

Average Wages over Time

CURRENTISSUESINECONOMICSANDFINANCE Volume 20, Number 3

Life-Cycle Wage Profiles, by Education

well over $1million more than high school graduates during

Economic Costs of College

High school diploma

As with all investments, a college education requires paying

Annual Published and Net Tuition for Bachelors

Total Cost of a College Degree

Bachelors net price

Associates net price

Associates Degree: Two-Year Cost

in constant 2013 dollars. For bachelors degrees, net tuition has

CURRENTISSUESINECONOMICSANDFINANCE Volume 20, Number 3

The Return to College

Return to Bachelors and Associates Degrees

employment while they are pursuing their education.13 Once

paying their college expenses. Thus, it is not necessary to incorporate such

historical wages and costs, and are meant to characterize average

The Return to College over Time

Does Your Major Matter?

Return to Bachelors Degree, by Major

Sources: U.S. Census Bureau, American Community Survey; U.S. Department of

with our estimates of the total cost of college to determine the

estimate a 15percent return to a bachelors degree and a 20percent return to

though some higher education institutions have recently experimented with

CURRENTISSUESINECONOMICSANDFINANCE Volume 20, Number 3

and hospitality, and education all have below-average returns.

What about the Chronically Underemployed?

allows us to simulate lifetime earnings for the average worker

Freeman, Richard B. 1976. The Overeducated American. San Diego, Calif.: