1. OPPORTUNITY
MINNESOTA
AN ECONOMIC ANALYSIS
EXECUTIVE SUMMARY
This report presents the findings of a cost-benefit analysis of a higher
education debt relief policy known as Opportunity Minnesota.
Opportunity Minnesota provides higher education debt relief and
reduces the barriers to a college education. The policy creates a tax
credit for higher education debt payments made the prior year for
students who graduate from a Minnesota higher education institution
and stay in the state. This reimbursement induces low-income or
marginal students to pursue a higher education, and those benefits are
quantified.
The key findings of this economic analysis are:
1. The total fiscal benefit to Minnesota from this policy for
every one degree induced is $123,865 and the total social
benefits are $847,133, for a total of $970,998 of economic
benefit.
2. The program pays for itself if it is able to generate a 12%
increase in the share of each cohort of graduates that
obtains a BS degree, or induces 2% more high school
students to pursue and attain a college degree.
3. The level of inducement (12% increase in cohort of
graduates) required for Opportunity Minnesota to offset the
fiscal costs for the state is feasible according to existing
studies and economic literature on higher education debt
reduction programs1
.
CREDITS
Economic analysis
conducted by Elton
Mykerezi PhD, Applied
Economics at the
University of
Minnesota – Twin
Cities. Supporting
analysis and content
was provided by Terry
Chaney, MPP.
Joshua Winters
provided additional
higher education debt
overview information
and policy
recommendations.
Special thanks to
Brian Dailey-Arndt,
Ryan Kennedy and
Charlie Bevis for their
efforts in advancing
this report.
2. 1
The policy recommendations from this economic analysis are:
1. Create a fully refundable tax credit that goes beyond
just reducing tax liability
2. Create a ratcheted income cutoff that decreases the
credit as income increases and cap the total amount
eligible annually for debt payments on qualified
education loans
3. Allow for payments on all federal Stafford unsubsidized
and subsidized loans, Perkins loans, and SELF loans.
4. The credit will only be eligible to those students who
stay in Minnesota post-graduation
5. Allow for employer to take the deduction if they offer
tuition payments as a benefit of employment
CONTENTS
Introduction………….5
The Student Debt
Crisis…………………6
A Cost Benefit
Analysis of
Opportunity
Minnesota………….10
Social Cost-Benefit
Ratio………………..14
Policy
Recommendations..15
Works Cited and End
Notes……...………..16
3. 2
AN INTRODUCTION
The rising costsof attaining a higher educationdegree are more burdensomenow than ever for prospective
students,and furtherbar low-income youthfromentering the middle class. 2
. Butthis trend is not uniqueto the
U ofM – it is true acrossthe board in bothpublic andprivate institutions. Asa result, Minnesota now has the
dubiousdistinction ofhaving the 3rd
highest average higher education debt in the countryat a whopping
$29,058,accordingtoanannual reportby the ProjectonStudent Debt3
.
It is estimated that cost factorsprevent48%of college-qualified high schoolgraduates from attending a four-
year institution, accordingtoa 2002 reportentitled EmptyPromises:TheMythof CollegeAccessinAmerica4
.The
price ofa higher education has becomea major factor. So muchso,that accordingto a 2012 surveybythe
National AssociationofCollege Admission Counseling(NACAC),collegeenrollment has begunto slow down,
particularly at private colleges acrossthe country5
. TheNACACcitedincreasing costsas reaching a “tipping
point” andwas a key driver behind sluggish enrollment. Ifthis trend continues,low-incomeindividuals will have
fewer andfewer paths torise upout ofpoverty and into the middle classto build a vibrant economy in whichall
Minnesotans cansucceedand prosper.
Greater state investments are needed in higher educationto offer real debt relief. These are investments in a
futurethat promotes economic vitality for all, regardless ofsocioeconomic backgroundorsocial status.
Decreasing studentdebt relieves an unnecessaryburdenonMinnesota’s youthand their families, and creates
greater economic mobility byeliminating a major financial constrainton college graduates. Opportunity
Minnesota is a concretepolicysolution that can lowerthe debt burdenforgraduates, divert economic activity
from debt payments to local economies,and promote a strongand educated workforce.
What is Opportunity Minnesota?
OpportunityMinnesota is a piece oflegislation based offofa bill that passed Maine’s legislature
overwhelmingly in 2007. It relieves studentloan debts for Minnesota residents that have graduatedfrom a
Minnesota higher education institution and continuetowork in the state following graduation. It is designed to
both relieve studentdebt and remove the costbarrier that prevents many Minnesotans from attending college.
Atthe same time, it incentivizes more students to goto college and complete their degree, and incentivizes our
highly-skilled workforcetostay in Minnesota, increasing entrepreneurship, businessinvestment, lifetime
earnings, and the tax base.
At its heart,Opportunity Minnesotaisa merit basedtaxcut provided tothe newest membersofthe
middle classas they ifthey achieve ahigher education.
This report first explores the currentstatus ofstudent loan debt federally and in the state. That overview is
followed byan economic analysis of the costsand benefits ofthe policy, the conditionsnecessary for the policy
to pay foritself, key assumptions usedin conductingthisanalysis, and recommendations forhow this policy
shouldbe crafted in Minnesota.
4. 3
THE STUDENT DEBT CRISIS
Student borrowingforhigher educationin the U.S. has reached a crisis level. Recently it wasreported that debt
incurredto financea college educationis now measured in the trillions ofdollars, surpassingeven credit card
debt. The long term economic impact of this debt burdenon studentsand their families is still uncertain.But
there is already evidence emerging that an entire generation couldbe so saddled with studentloan payments
that it will likely supplanthome mortgages and carloans. Most economists acknowledgethat borrowingfora
college education pays foritself overtime, since onaverage college grads do earn more. However,college
tuition rates have been increasingmuchfaster than inflation, leaving college graduates with crushinglevels of
debt that will likely become an obstacle to futureprosperity.
Financinga
college
educationis
especially
burdensome
forMinnesota
students,who
are graduating
with debt
levels that are
higher than
the national
average. The
Projecton
Student Debt
ranks
Minnesota 3rd
highest in
average debt for a fouryear degree ($29,058)andthe5th
highest percentage (71%) ofstudentsthat graduate
with debt.6
Studentsand their families have had to borrow moreto compensate forlarge decreases in the
state’s contributiontohigher education. AccordingtotheMinnesota Office ofHigher Education(MOHE),
comparedto the previous year, in 2011 thestate’s contributionforhigher education decreased by 14%and
tuition at state colleges increased by 12.8%.Between2006-2011“stateappropriationsfor public higher
educationper full-time student in Minnesota decreased by 21%while spendingper full-time student increased
by 5 and 6%.”7
Atthe same time, businesses expect potential employees toarrive onthe job witha higher
degree of training and expertise. The message to youngpeople today is that obtaining some kind ofpost-
secondaryeducation is required in order tocompete in a global economy.
Table 1. National trends on new student loans and total debt outstanding
5. 4
Atone time it was possible for college students toearn a fouryear degree and graduate relatively debt-free.
Today however,the typical college student mustmortgage his or her futureto secure a job froman employer
that expects,at the very least, a fouryear degree. Since 1985,the inflation rate forcollege tuition hasincreased
by more than three times the rate ofinflation. In2011 alone, college tuition and fees increased at a rate of
8.3%.8
Forthe 2011-12 academic yearthe average tuition bill at the University ofMinnesota was $13,062,and
as high as $31,862 atthe state’s private liberal arts colleges.9
Thus, the combinationof tuition inflation and a
reducedcontributionby the state, has forcedMinnesota families to borrow more.
Table 2. Inflation adjusted college tuition and fees
6. 5
Table 3. Tuition and debt from public and private schools in Minnesota10
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
1970-1971
1972-1973
1974-1975
1976-1977
1978-1979
1980-1981
1982-1983
1984-1985
1986-1987
1988-1989
1990-1991
1992-1993
1994-1995
1996-1997
1998-1999
2000-2001
2002-2003
2004-2005
2006-2007
2008-2009
2010-2011
2012-2013
U of M Tuition
MnSCU 4-year Tuition
MnSCU 2-year Tuition
Private 4-year Tuition
Average Student Debt Total
Average Student Debt Public
Average Student Debt Private
7. 6
AsTable 3 shows,tuitionat public college and universities has climbed dramatically over the last decade.
Duringthat same time period, studentdebt from bothpublic andprivate institutions has also risen dramatically
– growingmore than 52%over the last decade11
. Thoughthe cost ofattaining a higher educationfrom a
private institution has risen consistently over the last 40 years, the debt fromprivate schools is very close to
that from a public institution. In 2010-2011,theaveragestudent debt froma private schoolwas$31,459and
the average debt froma public schoolwas$28,907,fora differenceofonly $2,552. The close proximity ofthese
twonumbers is due in large part by the financial aid offeredby private institutions whichlimits the
indebtedness of their graduates. Oneunique aspectof the OpportunityMinnesota policy is that it addresses
both public and private debt.
It is generally acknowledgedthat having an educatedpopulace is necessary tomaintaining a competitive
business environment;and Minnesota has been a goodplace to dobusiness fordecades due in large part to its
educated workforce.State
economist Tom Stinsonhas
argued that education“has been
the key toMinnesota’s
productivityand prosperity.”
Moreover, Stinsonbelieves that
the state’s ability to remain
productiveand innovative in the
futurewill dependon the
investments in education that are
made today. In the nextten years
it is projectedthat more than half
ofall job openingswill require
some college orhigher.12
Therefore, to remain competitive
the state needs to think strategically aboutthe link between higher educationcosts andlong term economic
growth.
This study will examine a proposal that would
provide debt relief in the form ofa tax credit
to Minnesota students that complete a degree
at a state college and continueto work(and
pay taxes) in the state after graduation. A
similar bill passed in Maine with bipartisan
Table 4. National ratio of student loan debt to household
income
Student debt from both public and private institutions
has risen dramatically – growing more than 52% over the
last decade.
8. 7
supportand wasimplemented in 2008.Itisknownthat a percentageof non-marginal studentswill enter
college regardless ofany incentives. However,if the promise ofdebt relief caninduce additional (marginal)
studentsto enroll in college and earn degrees the benefits ofsucha program wouldbe increased. 13
A COST/BENEFIT ANALYSIS OF OPPORTUNITY MINNESOTA
This study providesan economic analysis of a proposedtax credit designed to offsetpart ofany student college
debt accumulatedthroughfederal studentloans forMinnesota residents whoobtain a bachelor’s degree from
one ofthe state’s institutions of higher learning, and whoare gainfully employed in the state after graduation14
.
The tax credit wouldbe equal to the smallest ofthe graduate’s annual payment on their federal loans (provided
the loan is extended overno fewerthan 10 years) and their total incometax liability to the state. Higher
educationbrings significant benefits to the recipients themselves and to society at large. Because muchofthe
benefit of an educatedpopulation accruestosociety at large, rather than the recipient alone, government
agencies at all levels of responsibility invest in making higher education accessible. OpportunityMinnesota
presents an innovative mechanism fordelivering suchan investment in ways that make higher educationmore
accessible, while rewarding accomplishmentand, likely, with minimal orno distortions to incentives forleaving
productivelives. Asproposed,the programwill
reimburse college graduates forpart, orall of their
annual dueson their federal studentdebt.
Undoubtedly,the majority of the recipients will
have decided to attend college regardless ofthe
existence of suchaprogram, andwill receive
benefits withoutchangingtheir educational/career
choices.This presents a fiscal costto the state, but
it does not necessarily impose a coston society;in
fact,it couldgenerate social benefits (tobe
discussedin greater detail to follow).We will label recipients whowill benefit withouta changein their plan as
the “incumbents”throughthe rest ofthis paper. The prospectofsuchreimbursement, however,will likely
make college accessible for some students,whoin the absence ofthe program,wouldhave deemed the
amount ofdebt required to pursuea degree too high. We will use the label “marginal students”and “induced
degrees” interchangeably to describe the latter; students whowouldcomplete a degree if the programwere in
place but whowouldnothave done so otherwise.
This study will answer the followingquestions aboutthe proposed program:1-Whatis the social value of a
college degree? 2-Whatis the fiscal benefit to the state froma college degree (in terms oftaxes and savings
from reduceduseof social programs/institutions).3-Fora representative cohortofMinnesota high school
graduates, whatis the minimum number of“induceddegrees” (relative to incumbents) thatthe programwould
have to producetofully cover the fiscal costsofthe program. 4-Wewill provide a discussionofthe potential
social costsand benefits of suchaprogram, relative to other mechanisms forinvesting in higher education and
tax law, witha focusonprecedentforeducation-related tax credits.
Because much of the benefit of an educated population
accrues to society at large, rather than the recipient
alone, government agencies at all levels of responsibility
invest in making higher education accessible.
9. 8
“Private” Benefits from a College Degree
The most salient benefit of a college degree accruestothe degree recipient in the form ofhigher wages in the
labor market as well as higher probability of being employed in any given point in time. Recentcomputations
from the BureauofCensusindicate that the present value of the lifetime earnings during a typical workinglife
ofa highschoolgraduate amount to a present value of$1,371,000 (in2011 U.S.dollars). A studyby Paul
Glewwe andAmy Damon foundthatin the U.S., onaverage, income earnings are increased by 7-9%for each
additional year of education.15
This study assumes a returnof 40%fora bachelor degree, a figure that enjoys
widespread consensusamongeconomists.16
Educated adults are also less likely to be unemployed at anypoint
in time. Foreach additional year ofschooling,an individual’s chanceofbeing unemployed is reduced by0.5-0.8
percentage points.17
This studyassumes a difference of2.8 percentage pointsin the probability of annual
unemployment between a high schoolgraduate and a BS holder.
“Public” Benefits from a College Degree
Inaddition tothese private benefits, there are others that are often notfactored by the recipient themselves
while they make college attendancedecisions, but that accruetosociety at large. Economistscall these
“positive externalities”. Educatedadults are less likely to commit crimes, use social assistance programs, more
likely todonate to charities, are more active and better informed participants in political processes,among
other things.18
All ofthese translate into quantifiable benefits to the state. Forinstance, average annual costs of
incarceration are around$20,000 peryear,social assistance programs impose administrative costs,as well as a
burdenassociated with raising the public revenue needed to operate these programs(also knownas Dead
Weight Loss oftaxation).We assignconservative dollar values to some ofthese external benefits based on
widely accepted standardsin the
academic literature in
economics.
Wage “Spillovers”
One ofthe most important
“external” benefits to an
educated populationis that
educated adults have a positive
impact on the productivityof
people aroundthem. This causesothers to be more productiveand is reflected onto the wagesof people other
than the recipient of the college degree themselves. Two ofthe most commonchannels forsuchspillovers are
throughcross-firmproductivityspillovers andvia social interactions amongcitizens.19
Moretti’s analysis
estimated that a onepercent increase in the number ofcollege graduatesincreased wages ofother college
graduates by 1.2%,whilethe spillover effects onthose withouta college educationare even higher.20
For
purposesofthis study,we usea conservativeestimate ofspillover effectsequal to half ofthe private effecton
wages.21
A study by Paul Glewwe and Amy Damon found that in the
U.S., on average, income earnings are increased by 7-9% for
each additional year of education.
10. 9
Fiscal Costs and Benefits
The total social benefit is computedas the sumof all ofthe above benefits from a college degree. Some of
those social benefits translate into fiscal benefits to the state in the form ofhigher revenues fromtaxes as well
as savings in the costsof runningsocial programsand variousstate institutions.22
We use median earnings data
by level ofeducation, incomeand sales tax rates forthe state, as well as publishedcosts ofsocial programs and
institutions to quantifythese fiscal benefits foreach degree. Table 1 showsthe social andfiscal benefits of
inducinga single college degree
in Minnesota.
We then use data from the MN
Officeof HigherEducation on
enrollment ofthe state’s high
schoolgraduates across
colleges, their graduationrates,
and annual federal debt incurred
to computethe debt liability
that the 2011 cohortof
graduates wouldincur.We then
computethe number ofinducteddegrees required forthe fiscal benefits of the programto match the costs.
The results of these computationsare foundin Table 6.
Some of those social benefits translate into fiscal benefits to
the state in the form of higher revenues from taxes as well as
savings in the costs of running social programs and various
state institutions.
11. 10
Table 5. Value ofa college degree
Social Benefits
Lifetime Salaryof Highschool graduate $ 1,371,000
Salarybenefitsof inducing1degrees: $ 548,400
Lifetime earningsof BSholder $ 1,919,400
Unemployment $ 14,533
Wage Spillovereffect $ 274,200
Reduced Incarceration $ 10,000
Total Social Benefit(public+ private) $ 847,133
Fiscal Benefits
Income tax--ownearnings $ 39,476.07
Income tax--Spillover $ 19,331.10
Salestax $ 44,677.46
UI benefits $ 10,380.43
Incarcerations $ 10,000.00
Total Fiscal Benefit $ 123,865.06
Table 6. Fiscalcostsassociatedwiththe 2011 high school graduatingclass,and minimalprograminduction
ratesneededto offset fiscalcosts.
State
University
University of
Minnesota
Private College &
University
TotalBS
program
Attendees 8123 5703 6217 20043
Graduates 3899 3707 4476 12082
Number with loans 2724 2123 3094 7942
Average perperson $ 5,573 $ 5,590 $ 5,988
Total debt per year $ 15,183,987 $ 11,867,915 $ 18,530,615 $ 45,582,517
Total debt per cohort $ 60,735,949 $ 47,471,659 $ 74,122,459 $ 182,330,068
Social Value ofdegree $ 849,990
Fiscal benefit ofdegree $ 123,865
Induceddegrees
required
1,472
Percentof College
Cohort
12%
Percentof HSgraduates 2%
12. 11
Social Cost-Benefit Ratio
First, wenote that the benefits computedhere are very conservative. We have used conservativenumbers on
returnsto degrees, wage spillovers andalmost all other figures.In addition, there are many benefits that are
left out. Forinstance,only the costofincarceration is factoredin relation to the reductionin crime. Crime,
however,imposes other fiscal costsassociated withpolicing as well as private coststo the victims of thefts,
assaults and murders.These canbe very large, andare notcomputed here. Additionally, all costsassociated
with useof welfare programs,benefits associated withincreased civic engagement and participation in political
processesare notfactoredin.
The social costsof sucha programare muchmore difficultto estimate as the answerwoulddepend on
assumptions aboutthe marginal costof public fundsandon the marginal value ofpublic services. Specifically,
each dollar used by the public sector has,in effect, costthe taxpayer more than one dollar. This is becausethere
is administrative costassociated with collectingand managing the revenue, as well as distortions in incentives
due to taxes that producea loss in efficiency.The latter is knownas a dead weight loss (DWL) inthe literature. 23
This credit is, in fact, a tax cut,sothere will be a proportional reductionin DWL andimplementing the policywill
generate a social benefit equal
to the additional marginal cost
ofthe public fundsthat are not
collected. Of course,there is no
free money, so the costofsuch
a move woulddepend onwhat
compensates it. Ifthe state
raises fundsfromother sources
then there wouldbe a marginal
costof collectingthe
replacement funds(whichmay
be higher or lower thanthe one
associated with income taxes
among recentcollege
graduates).Ifthe state cutsspending,what is lost is the marginal value ofthe services that will be cutto the
public.There is one additional potential cost. Ifstudentsare notborrowingthe maximum possible fromthe
federal government,they might be more inclined to doso with the programin place. However, moststudents
already borrow the amountallowed throughfederal programsand also resort to private sources.
While it is notpossible to estimate the possible tradeoffs ex-ante, twostatements canbe made onthis
program.The first is that if the program is able togenerate a 12%increase in the share of eachcohortof
graduates that obtains a BS degree or induces2%more high schoolstudents to pursueandattain a college
degree, the fiscal benefits wouldcovercostsand paying forinitial costsby incurringdebtwould be justified.
The secondis that if oneis ofthe opinion that a tax cutforthe middle classis already soundfiscal policy, the
program likely has no costs.Itturnsa taxcutfor the newest members of the middle class into a “merit based”
tax cutthat encourageshigher education.
If the program is able to generate a 12% increase in the share
of each cohort of graduates that obtains a BS degree, or
induces 2% more high school students to pursue and attain a
college degree, the fiscal benefits would cover costs and
paying for initial costs by incurring debt would be justified.
13. 12
POLICY RECOMMENDATIONS
The benefits discussed in the costs/benefitssection hinge greatly uponhow the policyis crafted. The goals of
this policy shouldbe to maximize the incentive to attain a college degree – it is precisely this inducement that
drives the benefits toMinnesota. The followingpolicy considerationsare recommendedto achieve that
objective:
1. Create a fully refundabletax credit that goes beyond justreducingtax liability
2. Create a ratchetedincome cutoffthat decreases the credit as income increases andcap the total
amount eligible annually fordebt payments on qualified educationloans
3. Allow for payments on all federal Staffordunsubsidizedand subsidizedloans, Perkins loans, and SELF
loans.
4. The credit will only be eligible tothose students whostay in Minnesota post-graduation
5. Allow for employer to take the deductionif they offer tuition payments as a benefit of employment
14. 13
WORKS CITED AND ENDNOTES
1 Sensitivityanalysis ofdebt relief programs suchas the one inDCprovides evidence that thisis feasible. For reference see,
Abraham, K., Clark, M., Financial Aid and Students’ College Decisions:Evidence from the District of Columbia Tuition Assistance Grant
Program, NationalBureauof Economic Research (NBER) Working Paper no. 10112, November 2003.
2 http://www.oir.umn.edu/static/tuition/TuitionUMNTC.pdf
3 http://ticas.org/posd/map-state-data-2015#overlay=posd/state_data/2015/mn
4 http://files.eric.ed.gov/fulltext/ED466814.pdf
5 http://www.nacacnet.org/research/research-data/documents/2011soca.pdf
6 http://projectonstudentdebt.org/state_by_state-sum2011.php
7 http://www.ohe.state.mn.us/mPg.cfm?pageID=1988&1534 D83A_1933715A=fc6e4fe085ee75ba33c6aadbf2b60f4f27d09ab3
8 http://www.bloomberg.com/news/2011-10-26/tuition-jumps-8-3-doubling-inflation-as-obama-plans-debt-relief.html
9 http://www.ohe.state.mn.us/mPg.cfm?pageID=949#1&1534-D83A_1933715A=e3a5b3ac6d1e8a797854b7ffae8ff06def06e269
10 http://www.ohe.state.mn.us Office of Higher Educationon Tuition, Project on Student Debt
11 Currently, existingdata ondebt from the Project on Student Debt onlygoes back to the 2003 – 2004 academic year. This report will be
updatedif andwhenadditional data becomes available.
12 http://www.ohe.state.mn.us/mPg.cfm?pageID=945
13 http://inflationdata.com/Inflation/Inflation_Articles/Education_Inflation.asp
14 The economic analysis section ofthis report was conductedandauthoredbyEltonMykerezi, PhD, Assistant Professor, Applied
Economics at the Universityof Minnesota - Twin Cities. Supporting analysis andcontent was providedbyTerryChaney, MPP.
15 Damon, A., Glewwe, P., Valuing the Benefits of the Education Provided ByPublic Institutions: A Study of the University of Minnesota and
the Minnesota State Colleges and UniversitySystem, Department of AppliedEconomics, Universityof MN, January2008, p.14.
16 Individuals witha BS degree earn$2,422,000 in their lifetimes, for a difference of over $1Mover highschool graduates. However, not
all of thisdifference canbe presumedto have beencausedbythe college degree. Individuals whochose to go to college may differ from
those whodon’t in a number of personalcharacteristics (e.g. intellect, persistence, ambition, familyresources andsocial capital, etc.),
thus part of the differencesmaybe a consequence of those same individual differences that causedone person to goto college and
another not to, rather than the degree itself. Extensive economic research intothe causal effect of a college degree has heldconstant
personalcharacteristics andhas generated quasi-experimental evidence on the true return to education.
17 Damon, Glewwe, p.17.
18 “Externalities” canbe best describedas “desirableby-products” of anindividualdecision. Whenone contemplateson whether to goto
college or not, theycompare expectedbenefits from perceived future earnings, prospects for job stabilityandpersonal satisfactionfrom
educationwiththe financial costs and ‘trouble’ of goingto college. It is unlikelythat one decides to go to college because suchan
experience willreduce the likelihoodthat theycommit a crime, their willingnessandabilityto vote, desire to volunteer/donate, etc. All of
the latter are a desirable by-product of anindividual’s quest for better labor market outcomes and/or personalsatisfactionfrom
schooling.
19 Suppose someone infirm A is responsible for ordering suppliesfrom firm B. Ifthe personin firm B is more educated, theylikelymake
fewer mistakes, could share useful insight withtheir collaborator from firm A, etc. This results insomeone at firm A enjoyinghigher
productivitybecause firm B hireda more educatedworker. Also, people relyonsocial interactions for learning, businessideas, resolving
personalproblems, handling issues at work, etc. Anyone person would benefit more from such interactionif it were witha mo re
educated person.
20 DamonandGlewwe’s analysis is muchmore conservative, estimating a spillover effect of 0.5% on degree holders and0.75% on non-
degree holders.
21 A recent study(Moretti, 2004) showedthat, after holdingindividualcharacteristics constant, people whowere surroundedby more
educated people hadhigher wages. A one percentage point increase inthe incidence of college degrees inone’s citywas estimatedto
increasesthe wages of high-school dropouts by1.2 percent, the wages of high-school graduates andthose withsome college by1.4
percent, andthe wagesof college graduates and ofthose with graduate degrees (master, professional anddoctoral degrees) by1.2
percent. Some believe that these estimates maybe toohigh, since theyimplythat the public benefit canbe higher thanthe p rivate.
Glewwe and Damon (2011) use conservative estimates(of approximately2/3s of the effect estimated inMoretti (2004)) intheir studyof
the impact of public educationsubsidiesinMinnesota. Our numbers are more conservative than either of those studies.
22 DamonandGlewwe estimatedthat thiswouldamount to a benefit of8.8%.
23 To understand the notion ofthe DWL of taxation, consider the following example. A college professor is presented withanopp ortunity
to do one more consulting project duringthe summer, for the amount of $5000. With that beingthe last $5000 the worker willmake
during that tax year, the marginal tax rate that applies to this project will be one of the higher rates (depending onhowmu chhas been
earnedalready), so the net profit fromthe project would be onlya fraction ofthe gross revenue (let’s assume $4000 for purposesof
exhibition). It mayeasilybe the case that thisis the kindof project that the worker woulddo for $5000, but wouldchose n ot to dofor
$4000. So in the absence ofa tax the personwouldbe working andproducing a social value of $5000, while inthe presence the personis
producing$0. The same applies to decisions ofmarginal workers acrossthe state, onwhether to take the overtime hours if th eyhave a
15. 14
chance, on whether one takes a second part-time job, or starts a side business, and evenonwhether the marginal familymember should
work at all or be a home-maker.