Don’t get a Bachelors if you discount by 6-7%
by Benjamin on August 8, 2009
I have today discovered that my discount factor of future income is less than 6-7%, because I would tell my kids to do their homework and stay in school… If I was to discount future income by more than 6.56% I would not send my daughter to do a B.A., but rather would put her into the maximum allowable full-time work under New York State labour laws from the day she starts school, and let her fail after 9th grade. Her discounted income from the two activities equal out at the 6.56% discount rate. Similarly, due to gender differences in U.S. median wages, my son shouldn’t try to get an undergrad degree if my discount rate is more than 7.95%. While a Masters degree increases the discount rates, a Ph.D. is not at all desirable for the boys out there (anything above 7.2% rate equalises the return with dropping out at 9th grade), while a masters degree or Ph.D. is almost the same for girls (7.1% and 7.08% respectively).
If my child is lazy – the genetics factor works against me here – and therefore wont work full-time during their school years, my discount of the future would have to be considerably higher for allowing them to fail school. In fact they will be encouraged to get some form of education, as the BA requires a whopping 14.86% discount of the future for boys, and 13.61% for girls to give the same return as dropping out. If my discount rate was a bit lower, say 10.66% (boys) or 11.1% (girls), I’d discourage the Ph.D., but still go for the Masters…
This is either a fun example of why discounting isn’t such a great idea for long term projects; or it’s an example of the governments belief in the rational behaviour when they instituted 12 years of compulsory schooling – although the NY legislative forgot about it when they set up the child labor laws of the State. Below is the full table of discount rates which would equal out a degree holders gross 2004 median income and years in school.
I could play with the data to get net rates of pay, change my assumption of retiring at 64, get regional specifics etc, but I just wanted to make this point, and happily share my excel calculations, sources and data-set here, so you can play with it. Beware the Long-term discounter…
Tags: Cost-Benefit Analysis, Discounting, education, gender economics
