Blogs | September 6, 2010

How a gap year may make you richer

So, you’ve failed to get into your first choice of university. Should you worry? The answer depends on what universities do for us. The standard view is that universities teach us valuable skills, which increase our earnings in later life. If this is right, failing to get into a top university means you miss the chance to get a great education – and will earn less. But research suggests this idea might not be right.

A university place signals a degree of intelligence
Alan Krueger of Princeton University and Stacy Berg Dale of the Andrew W. Mellon Foundation found that people who were offered a place at the best universities but attended lesser ones went on to earn the same as those who actually accepted their offers. This corroborates a theory proposed by Michael Spence in the 1970s, who received a Nobel Prize for his efforts. Going to university, said Spence, signals to prospective employers that you're smart. The mere fact of getting a place at Oxford or Yale tells employers that you're clever. What you learn there isn't so important. Missing a place at a top university doesn't, therefore, necessarily mean you're missing the sort of education that increases your earnings. What you're losing is a signal that you have superior ability.

Signals can come from your life experience and commitment as well
And here's the good news. There are other things you can do to improve the signal you send to prospective employers. Here are four:

  • First, build your CV by extracurricular activities. Running a bar or arranging concerts can signal organisational skills. Likewise, getting involved in sports can also pay off – with the Krueger-Dale study finding members of sports teams earn 10% more than other graduates. This isn't a US quirk. Michael Lechner of the University of St Gallen has shown that Germans who regularly play sport earn €1200 a year more than those who don't. Employers value the teamwork and discipline associated with sport.
  • Secondly, consider taking a gap year. United Kingdom academics Ian Walker and Yu Zhu found people who take a gap year earn 25% more, on average, than people who don't. A well-organised year out (not one lazing in front of the TV) can boost self-confidence or language skills, or provide useful work experience.
  • Thirdly, choose your discipline carefully. Walker and Zhu also found that, in the UK, men with arts degrees actually tend to earn less than those who didn't go to university at all. This is probably not because universities make some men stupider. Instead, it's consistent with Spence's signalling theory: studying (say) English suggests that you are self-indulgent, innumerate and have anti-business sentiments that equip you only to work for a newspaper or the TV news. Economics degrees, on the other hand, tend to pay well. Don't ask why.
  • Finally, do not drop out. In the UK at least, drop-outs often earn less than those who never started university. Dropping out signals that you have commitment problems, and employers hate commitment problems.

A final lesson
So, if you have missed your first-choice university, don't despair. Remember instead the words of the American conservative Thomas Sowell: "One of the best things about going to Harvard is that, for the rest of your life, you are neither intimidated nor impressed by people who went to Harvard."


Chris Dillow
Chris Dillow

Investors Chronicle writer and economist