Thompson Rivers University

Researchers re-examine the opportunity cost of education concept to consider work-life effects.

October 16, 2012

Dr. Hafizur Rahman, Dr. Jim Seldon (deceased) and Dr. Zena Seldon argue that the opportunity cost of education is not only foregone wages, tuition, textbooks and additional living expenses but should include the additional cost associated with a reduction in years of future labor force participation. They argue “that although this ‘work-life’ effect may safely be ignored in calculating rates of return to education, it must be taken into account if the goal is to correctly identify the cost of individuals’ time out of the labor force, particularly for purposes other than education.”

Using an illustrative example they show that the cost of delaying entering the labor market is systematically understated if work life impacts are not accounted for.

For example, a high school graduate who enters the labor force at age 18 with starting salary of $18,991 and retires at age 65 with salary $63,104 has a present value earnings capacity of $600,000 over the life cycle assuming a 2% real interest rate. The same graduate if she delays entering the labor market, for whatever reason, for say five years will not have as starting salary of $21,57 which is on the same earnings-age profile due to work experience but on a lower earnings-age profile with starting base salary of $18,991 similar to a new graduate. The additional cost of delay entering the labor market is estimated at $152,000 in present value. A sizable amount of additional cost due to the delay of entering the labor market.

Reasons for delaying to enter the labour market could be out of the control of the individual such as illness, unemployment due to bad economy, military service, family, and so on.

I used their methodology to do a fast calculation on the additional cost of increased youth unemployment due to the recent austerity measures imposed on Greece. Due to these measures Greece has a youth unemployment rate of 50% relative to 20% prior to the measures. My quick calculations indicate a huge cost associated with the delay of youth entering the labor market.  Youth could have a two year or more average duration in the unemployment pool. Unemployed youth could be as high as 500,000 people relative to pre austerity unemployed. If the additional costs associated with work life effects is estimated at say $100,000, instead of $152,000 as in their example, then the present value of the total cost is of the $50 billion magnitude. Furthermore, austerity measures include a drop in the base salary which will increase the magnitude to over 60 billion dollars. These costs are purely due to the delay in entering the labor market and does not account for other economic and social costs associated with youth unemployment.

Many nations have military service mandatory. Military service delays entry into the labor market and could lead to less work experience. To the extend that military service is not a perfect substitute to work experience an empirical quesiton the methodology of the authors can be applied to determine the additional cost of such service.

Their research has been recently accepted for publication in the Journal of Economic Educators. An online  journal published by Middle Tennessee State.  The article is titled: “The opportunity cost of Education: Where do the lost years go?”


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