Chris Rockwell: Has  a Master’s Degree Become a Negative Job Market Signal?

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I wrote positively about Master’s degrees in economics in “On Master’s Programs in Economics.” In the 7th student guest post this semester, Chris Rockwell effectively expresses skepticism about the value of most master’s degrees. There is some resonance with what I say in my column “The Coming Transformation of Education: Degrees Won’t Matter Anymore, Skills Will.” Here is Chris:

Why a masters degree can make candidates less desirable to employers

Traditionally further education was associated with higher intelligence, increased income and higher social status. However, these correlations have changed drastically and now many of the most talented, qualified undergrads actually do not immediately enter graduate school. Because of this, I believe having a masters degree can actually make candidates appear less valuable to employers.

To estimate the average talent of those who get a masters degree, I will consider the option of obtaining this degree from a few different perspectives. As stated earlier, I believe some groups may choose not to get one, even if they could. This is due to graduate school being very expensive and requiring key time out of the work force. Additionally, getting a masters degree can be risky given upon graduation given there is no guarantee of a high quality job. I think masters candidates break nicely into three pools; all of them having different costs and benefits. Note I will examine the effect of a masters degree from a purely financial perspective, but I assert this is reasonable given people who are less interested in money would be more likely to get a PHD anyway.

First, I will consider an undergrad from the US with some competence, relatively good grades and solid test scores (for example, Michigan grad from random major with 3.5, little work experience, and a 80th percentile GRE). I assume this student might get some job offers, but they will probably not be stellar and might be closer to the $40-50k / year range. This student is basically faced with two options: school or work. Suppose if this student were to attain a masters degree it would be in business — the best performing grad school financially. In this case, after 2 years of missing work and $200k more debt, they would probably be looking at a salary closer to $80,000. All in all, Forbes calculated this is better than the alternative for this student. (A 10 year back-of-the-envelope calculation supports this: $80k * 10 – $200k = $600k > $50k * 10 = $500k).

The next group of students are international and talented — good enough to get into a comparable graduate university. However, these candidates often do not have the opportunity to pursue a job out of undergrad because of work visa restrictions or lack of English fluency. Hence, for them graduate school can be a must.

The final group of students I am considering are those who are excellent undergraduates and have the ability to land top offers. These offers can pay very well, often including base salaries ranging from $60,000 – $120,000. For students with such strong job offers, attending graduate school will generally not raise wage in any meaningful way in the near future. For example, at many top firms employees fresh out of graduate school with no work experience are paid the same wage or only a slightly higher wage than their undergraduate peers. Hence, for these top undergraduates, attending grad school right away makes no sense: doing so could in fact put them in a worse job market than the one they face upon graduation (not to mention cost and lost time).

So, under the assumption students maximize income, undergrads who attend grad school are often less talented than those who go straight into the work force. It follows that for recruiters at top firms, who only consider these three pools of people anyway (nobody with below a 3.5 for example), candidates who have received a graduate degree actually appear less attractive than those who have not. The clear exception to this is jobs requiring a masters degree, however many employers hiring for technical roles will teach undergrads on the job anyway.

Considering having a masters degree could be a negative job market signal, it might be surprising to note grad school attendance continues to climb. However, this actually makes sense because for most employees having a masters degree is still probably a positive signal. The group of less talented undergrads who get a masters are in general more desirable than their peers who do not. Hence it seems reasonable to conclude students with masters degrees are likely to be somewhat talented but probably not the best hires possible for employers.

In conclusion, modern graduate schools attract talented workers, but often not the best. The opportunity and monetary cost associated make these schools obsolete for the most talented individuals. In 2015, top firms should focus on undergrads when recruiting.