Non-elite business programs boost earnings more than most assume (Michael Simkovic)

A popular narrative is that business school is not worth the time and money, especially outside of a handful of elite programs.  This narrative closely echoes earlier critiques of legal education that have since been thoroughly debunked. (See here, here, here, here, here, here, here, here, here, here).  As was the case with legal education, the anti-business school narrative has been followed by multi-year declines in applications to business school and a shift toward more online programs.

As with legal education, the anti-business school narrative does not appear to be supported by the data.  A careful study by Peter Arcidiacono at Duke tracked the incomes of GMAT test takers who attended business school, before and after business school.  The study compared the income trajectory of business school students to the income trajectory of similar test takers who did not attend business school.  

Arcidiacono et al. found evidence of negative selection into non-elite business schools. That is, the sorts of people who attend non-elite business schools had lower incomes before business school than one would expect given their test scores, academic performance, demographics, and other observable characteristics.  The areas in which they likely had lower (but difficult to observe) earning potential included less developed social skills and more limited social connections.

This means that non-elite business schools actually boosted their students' earnings by more than has been previously assumed. Moreover, the fact that Arcidiacono et al. focused on earnings within a few years of graduation means that they very likely understated the benefits of business education.  Those with graduate degrees typically see the annual boost to earnings from their degrees rise until they reach peak earnings, usually in their 50s.

One key takeaway is that social connections are an important part of the value of education.  Even non-elite graduate programs can help their students improve social skills and forge valuable connections.  This may not bode well for the value of online education relative to traditional brick & mortar education.

Arcidiacono's study came out in 2008, but discussion of it has been remarkably absent from press coverage regarding the value of business education.  My next post will delve into some of the possible reasons for low quality and overly negative education news coverage.