Why university offers best return on investment

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In case you missed Statistics Canada's annual report on the cost of university tuition, post-secondary education is getting pretty expensive. The average cost for full-time university tuition for an undergraduate student is $5,581 a year as of 2012/13. That's up 5 per cent from a year earlier, compared to a 1.3 per cent increase in the overall cost of living. Tuition has been rising in inflation-adjusted terms for years. A study by the Canadian Centre for Policy Alternatives found that between 1990 and 2012, Canadian tuitions rose by about 6.2 per cent annually – about three times the rate of inflation.

So, is it still worth it to get a university education? According to the Organization for Economic Co-operation and Development (OECD), it is.

According to the OECD data, as of 2010 (a couple of years after the global recession had hit and when its labour market effects were ongoing) the unemployment rate within its 34 member countries was 7.3 per cent for men, and 7.2 per cent for women. For university graduates, however, the figures were 4.4 per cent and 4.7 per cent respectively. In Canada, a man with a university degree had an unemployment rate of 5.2 per cent and a woman a 5 per cent unemployment rate, compared to 7.3 per cent and 6.3 per cent overall.

But never mind that: employed could mean a lousy job serving coffee, right? How much are you going to earn if you do shell out for university? The OECD looked at that too -- this is where it really gets interesting.

There is a lot involved in getting a university education. You have to pay the freight, then forego earnings for four years or more. Then you will presumably earn more – but also pay more in taxes. Then again, you are less likely to have periods when you earn nothing all because you are unemployed (in a crunch, university grads arguably have an edge over those with less education when it comes to the service jobs).

The OECD took all of those considerations into account, then calculated the net lifetime benefit of going through third-level education as an 'internal rate of return' – basically the same indicator that businesses use when they are deciding whether a project is worth their investment. Their verdict? In Canada, the return on a male investing in third level education comes to about 10.8 per cent. The OECD average is a little higher, at 12.4 per cent, while in the U.S. it is 11.5 per cent. For a woman, the return in Canada was 11 per cent, while the OECD average was 11.4 per cent, and in the U.S. it was 8.8 per cent.

If you were to put your money into a government bond (Canada or the U.S.) right now with a maturity of over ten years, you would be very, very lucky to get a yield of 2 per cent; more likely it would be less than 1.5 per cent. You might do better in the stock market, but recent history suggests this in not likely.

And what about the returns to governments that subsidize higher education? Like students, governments pay something towards the cost of education. They forego tax income when students are in school, but get some back later through those higher earnings.

The verdict? Investing in university education for a man, gives you a rate of return in Canada of 8.9 per cent, and investing in education for a woman gives you 8.5 per cent. The U.S. returns are much higher – 14.5 per cent and 9.7 per cent, while the OECD average is 10.8 per cent for a man and 8.8 per cent for a woman. So investing public money into education also looks like good value.

Now, I do know that the past is not necessarily prologue: it could well be that the next decade is not going to be the employment bonanza the last few turned out to be for university grads. And then there's the argument that says if everybody gets a university education, then the value of a university education plummets.

As usual, the best bet appears to be sticking with the odds, and the odds are that third level education is the way to go.

Linda Nazareth is Principal of Relentless Economics Inc. and senior fellow for economics and population change at the Macdonald Laurier Institute. Visit her at www.relentlesseconomics.com.