It’s well-known that those who major in economics earn more, on average, than those who major in other social sciences or in the humanities. But why? One possibility is that those who are more interested in earning income or in industries that tend to pay more will be more likely to become economics majors. Thus, the higher pay of economics majors might just reflect this sorting of pre-existing preferences, not any causal effect of majoring in economics.
To determine if majoring in economics causes higher incomes in the ideal world of social scientists, one might want to experiment with a large group of students, who would be randomly assigned to majors and then we could track their life outcomes. For good and obvious reasons, that experiment is impractical. However, with a dollop of research creativity, it is possible to look for a “natural experiment” where real-world experience approximates this ideal social science experiment. Zachary Bleemer and Aashish Mehta find a way to do this in “Will Studying Economics Make You Rich? A Regression Discontinuity Analysis of the Returns to College Major” (American Economic Journal: Applied Economics 2022, 14:2, 1–22, ).
The authors focus on a specific rule at the University of California-Santa Cruz: If a student doesn’t have a grade point average of at least 2.8 in the two introductory economics courses, that student (usually) cannot go on to major in economics. We can reasonably assume (and this assumption can be checked) that students who are just a little above the 2.8 cut-off are in many ways quite similar to those just below the 2.8 cut-off, except for a few points awarded (or not awarded) on a midterm or a final exam. Thus, the authors focus not on comparing all econ majors to all non-econ majors, but instead just compare those slightly above or below the grade cut-off.
This methodology is called “regression discontinuity.” Basically, it looks at at those just above or below a certain cutoff, which can be grades or income or qualifications for a certain program or any number of things. Comparing those just above and just below the cutoff is close to a hypothetical randomized experiment: that is, you have a group of very similar people, and because some are a tick above and others are a tick below the cutoff, some are eligible for a certain program and some are not. At least as a first approximation, subject to later in-depth checking, it’s reasonable to view later differences between those just-above and just-below the cutoff as a causal effect. The authors write:
Students who just met the GPA [grade point average] threshold were 36 percentage points more likely to declare the economics major than those who just failed to meet it. Most of these students would have otherwise earned degrees in other social sciences. Students just above the threshold who majored in economics were surprisingly representative of UCSC economics majors on observables; for example, their average SAT score was at the forty-first percentile of economics majors.
Comparing the major choices and average wages of above- and below-threshold students shows that majoring in economics caused a $22,000 (46 percent) increase in the annual early-career wages of barely above-threshold students. It did so without otherwise impacting their educational investment—as measured by course-adjusted average grades and weekly hours spent studying—or outcomes like degree attainment and graduate school enrollment. The effect is nearly identical for male and female students, may be larger for underrepresented minority students, and appears to grow as workers age (between ages 23 and 28). About half of the wage effect can be explained by the effect of majoring in economics on students’ industry of employment: relative to students who did not qualify for the major, economics
majors became more interested in business and finance careers and were more likely
to find employment in higher-wage economics-related industries like finance, insurance, and real estate (FIRE) and accounting.
For comparison, the income difference between economics majors as a group and non-econ majors is not a lot larger than this: “Forty-year-old US workers with undergraduate degrees in economics earned median wages of $90,000 in 2018. By comparison, those who had majored
in other social sciences earned median wages of $65,000, and college graduates with any major other than economics earned $66,000.”
Thus, this finding suggests that a large part of the income difference between econ majors and other majors is a causal effect of the economics major. In addition, a much of the difference is because those who are just-above the 2.8 cut-off are much more likely to end up in certain categories of high-paying jobs than those who were just below the cut-off. The data in this study can’t answer the underlying question of why this might be so. Do economics majors have an academic background that makes them more suited for such jobs? Do economics majors have a culture that is more supportive of looking for such jobs? Do employers in these sectors have a preference for economics majors over other majors? Whatever the underlying reason, becoming an economics major does seem to have a substantial causal effect on later career choices and income.