Schooling as an investment in human capital

Human capital is the stock of innate abilities and acquired skills that determines a worker’s productivity. Schooling adds to it at a cost paid now, tuition plus forgone earnings, in return for higher earnings later. A worker who maximizes the present value of her lifetime earnings stays in school until the marginal rate of return to another year equals her discount rate.¹²

Education and labour market outcomes

Education is strongly associated with participation, employment and earnings. In 2025, among Canadians aged 25 to 54, 71.4 percent of those with some high school but no diploma were in the labour force, against 82.1 percent of high school graduates and 91.9 percent of bachelor’s degree holders. Their unemployment rates were 10.8, 7.5 and 5.1 percent.³

Median employment income by highest level of education, Canada

Median employment income in 2020, full-year full-time workers aged 25 to 54 (2021 Census)

No certificate, diploma or degree$44,800

High school diploma$54,000

Apprenticeship or trades certificate$60,800

College or CEGEP diploma$61,600

University certificate below bachelor's$63,600

Bachelor's degree or higher$81,000

Median employment income of Canadians aged 25 to 54 who worked full year, mostly full time, in 2020. Holders of a bachelor's degree or higher earned $81,000, half again as much as high school graduates ($54,000).Source: Statistics Canada, Table 98-10-0597-01, Employment income statistics by industry sectors, highest level of education, immigrant status and period of immigration, work activity during the reference year, age and gender (2021 Census of Population). Retrieved 2026-10-23.

Show the data and notes

The Labour Force Survey publishes no annual table of wages by education, so this uses the 2021 Census. Restricting to people who worked 49 or more weeks in 2020, mostly full time (30+ hours a week), holds hours roughly constant, so the gaps approximate differences in pay rates. Employment income = wages, salaries and commissions plus net self-employment income; both genders. Pandemic benefits such as CERB are government transfers and are not included. This table does not split degrees above the bachelor's level.

Category	Median employment income
No certificate, diploma or degree	$44,800
High school diploma	$54,000
Apprenticeship or trades certificate	$60,800
College or CEGEP diploma	$61,600
University certificate below bachelor's	$63,600
Bachelor's degree or higher	$81,000

U.S. college wage premium

Median weekly earnings, bachelor's degree or higher ÷ high school only, full-time workers aged 25 and over

In the United States, full-time workers aged 25 and over with a bachelor's degree or more have earned between 1.69 and 1.88 times as much as high school graduates in every published quarter since 2000; in the third quarter of 2026 the ratio was 1.76 ($1,752 against $993 a week).Source: FRED, Employed full time: Median usual weekly nominal earnings (second quartile): Wage and salary workers, 25 years and over: Bachelor's degree and higher (LEU0252918500Q); High School graduates, no college (LEU0252917300Q), U.S. BLS Current Population Survey. Retrieved 2026-10-23.

Show the data and notes

Ratio of the two published medians (quarterly, not seasonally adjusted). High school only = high school graduates with no college. Raw ratio: it does not control for age, experience or occupation. Not published: 2025-Q4 (October 2025 Current Population Survey data were not collected during the federal government shutdown).

Period	Bachelor's or higher ÷ high school
2000 Q1	1.761
2000 Q2	1.753
2000 Q3	1.771
2000 Q4	1.767
2001 Q1	1.789
2001 Q2	1.757
2001 Q3	1.778
2001 Q4	1.746
2002 Q1	1.764
2002 Q2	1.765
2002 Q3	1.769
2002 Q4	1.740
2003 Q1	1.750
2003 Q2	1.771
2003 Q3	1.702
2003 Q4	1.739
2004 Q1	1.772
2004 Q2	1.689
2004 Q3	1.714
2004 Q4	1.714
2005 Q1	1.750
2005 Q2	1.705
2005 Q3	1.739
2005 Q4	1.759
2006 Q1	1.721
2006 Q2	1.772
2006 Q3	1.739
2006 Q4	1.752
2007 Q1	1.711
2007 Q2	1.829
2007 Q3	1.784
2007 Q4	1.780
2008 Q1	1.802
2008 Q2	1.782
2008 Q3	1.830
2008 Q4	1.801
2009 Q1	1.835
2009 Q2	1.810
2009 Q3	1.844
2009 Q4	1.757
2010 Q1	1.827
2010 Q2	1.809
2010 Q3	1.862
2010 Q4	1.799
2011 Q1	1.817
2011 Q2	1.774
2011 Q3	1.811
2011 Q4	1.807
2012 Q1	1.773
2012 Q2	1.766
2012 Q3	1.806
2012 Q4	1.805
2013 Q1	1.826
2013 Q2	1.844
2013 Q3	1.781
2013 Q4	1.881
2014 Q1	1.817
2014 Q2	1.782
2014 Q3	1.718
2014 Q4	1.843
2015 Q1	1.834
2015 Q2	1.785
2015 Q3	1.836
2015 Q4	1.804
2016 Q1	1.841
2016 Q2	1.810
2016 Q3	1.809
2016 Q4	1.819
2017 Q1	1.823
2017 Q2	1.797
2017 Q3	1.780
2017 Q4	1.790
2018 Q1	1.804
2018 Q2	1.804
2018 Q3	1.818
2018 Q4	1.796
2019 Q1	1.827
2019 Q2	1.807
2019 Q3	1.846
2019 Q4	1.850
2020 Q1	1.805
2020 Q2	1.797
2020 Q3	1.837
2020 Q4	1.819
2021 Q1	1.801
2021 Q2	1.813
2021 Q3	1.804
2021 Q4	1.765
2022 Q1	1.844
2022 Q2	1.846
2022 Q3	1.797
2022 Q4	1.768
2023 Q1	1.834
2023 Q2	1.786
2023 Q3	1.790
2023 Q4	1.754
2024 Q1	1.865
2024 Q2	1.838
2024 Q3	1.794
2024 Q4	1.745
2025 Q1	1.841
2025 Q2	1.804
2025 Q3	1.783
2026 Q1	1.805
2026 Q2	1.779
2026 Q3	1.764

These are raw gaps. They show what the model has to explain, not the causal return to schooling: people who stay in school longer differ in other ways, a problem taken up below and in returns to schooling.

The intuition

A year of university costs a student who could work full time two things: direct costs such as tuition, fees and books, and the earnings she gives up, usually the larger of the two. Average undergraduate tuition for Canadian students is $8,021 in 2026/2027, and $8,260 in Alberta.⁴ The return is higher earnings over the rest of her working life, plus any non-monetary benefits. Costs come first and returns later, so the decision turns on how she values future dollars against present ones.

Present value

The present value of $$y$ received $t$ years from now is

$$PV = \frac{y}{(1 + r)^t},$$

where $r$ is the discount rate. $5,000 two years from now at 4 percent is worth $5{,}000 / 1.04^2 = 4{,}622.78$ dollars today, because $4,622.78 invested at 4 percent grows to $5,000 in two years. The discount rate reflects the market rate of interest and the person’s time preference, how she weighs consumption now against consumption later. An impatient person has a high discount rate.

Should she go to university?

Take an 18-year-old who can earn $w_{HS}$ a year until retirement at 65, or spend four years at university, paying direct costs $H$ a year and earning nothing, then earn $w_{COL}$. Counting the first year as $t = 0$,

$$PV_{HS} = \sum_{t=0}^{46} \frac{w_{HS}}{(1+r)^t}, \qquad PV_{COL} = -\sum_{t=0}^{3} \frac{H}{(1+r)^t} + \sum_{t=4}^{46} \frac{w_{COL}}{(1+r)^t}.$$

She goes to university if $PV_{COL} > PV_{HS}$. University is more attractive when the wage premium $w_{COL} - w_{HS}$ is larger, when direct costs $H$ are lower, when the working life after graduation is longer and when the discount rate is lower. A higher discount rate barely changes the costs, which come first, but shrinks the gains, which come over the following decades.

Discount rate, r

5.0%

PV of high school earnings

$1,020k

PV of university earnings minus tuition

$1,198k

University minus high school

$178k

Open in Graph Lab

Figure 1. High school ($54,000 a year from age 18) and university ($8,000 a year of direct costs from 18 to 21, then $81,000) earnings streams, discounted to age 18. At a 5 percent discount rate university is worth about $178,000 more in present value; above about 9.3 percent high school is worth more.

The wage-schooling locus

With many possible years of schooling, the worker faces a wage-schooling locus: the annual earnings employers pay her for each level of schooling. The locus comes from labour market equilibrium, the supply of and demand for workers with each level of schooling, and the individual takes it as given. Its properties:

1. It slopes upward. Schooling is costly, so no one would invest unless more schooling paid more.
2. Its slope is the extra earnings from one more year, $\Delta w / \Delta s$, in dollars.
3. It is concave. Each additional year adds less than the one before: returns diminish.

The marginal rate of return (MRR) is the percentage increase in earnings from one more year of school, $(\Delta w / w)/\Delta s$. It is the slope divided by the current wage, not the slope itself.

Years of schooling completed, s

12

Earnings at s years

$40.0k

Extra earnings from one more year, Δw

$6.6k

Marginal rate of return, Δw / w_s

16.5%

Open in Graph Lab

Figure 2. A concave wage-schooling locus. Going from 12 to 13 years raises earnings from $40,000 to about $46,600, a marginal rate of return of 16.5 percent; going from 16 to 17 years adds about $3,000 to $60,000, a return of 4.9 percent.

The stopping rule

Another year in school, from $s$ to $s + 1$ years, costs the year’s earnings $w_s$ and raises earnings by $\Delta w$ in every later year. With a long working life the present value of that gain is about $\Delta w / r$, so the year pays if

$$\frac{\Delta w}{r} > w_s \iff \frac{\Delta w}{w_s} > r \iff MRR > r.$$

Equivalently, schooling returns MRR percent on the earnings invested in it, while the alternative is to work and invest the same money at rate $r$. Since the MRR falls with schooling, the worker maximizes the present value of lifetime earnings by stopping at

$$MRR(s^*) = r.$$

The rule is exact when the working life is very long and the only cost of school is forgone earnings; tuition, a finite working life, uncertainty about returns and the consumption value of school complicate it.

Discount rate of the impatient worker, r_H

10.0%

Discount rate of the patient worker, r_L

5.0%

Schooling of the impatient worker, s^*_H

13.8 years

Schooling of the patient worker, s^*_L

16.3 years

Earnings of the impatient worker

$50.9k

Earnings of the patient worker

$61.1k

Open in Graph Lab

Figure 3. The marginal rate of return falls with each year of school. A worker with a 10 percent discount rate stops at about 13.8 years and one with a 5 percent rate at about 16.3 years, where the MRR equals each discount rate.

Key idea

Stay in school while the marginal rate of return exceeds the discount rate. Patient people and people with higher returns get more schooling.

What schooling data can tell us

People get different amounts of schooling for two reasons.

• Different discount rates. If workers share one wage-schooling locus and differ only in patience, each picks a different point on the same locus. The observed relationship between schooling and wages then traces out the locus, and the wage gap between two workers is what the extra schooling would give the less-schooled one. That is the number a policy such as a tuition subsidy or compulsory schooling needs.
• Different abilities. If more able workers face a higher and steeper locus, they earn more at every level of schooling and also choose more schooling. The wage gap between a high-schooling and a low-schooling worker then combines the effect of schooling with the effect of ability, and overstates what extra schooling would do for the less able worker. This is ability bias.

Ben's ability advantage: extra earnings at 14 years ($ thousands)

$8.0k

Observed return per year, Ann to Ben

22.4%

True return per year for Ann

14.0%

Ability bias (percentage points)

8.5

Open in Graph Lab

Figure 4. Ann stops at 12 years of school and Ben at 14. If they differ only in discount rates they share a locus and the observed return, 14.0 percent a year, is Ann's true return; if Ben also earns $8,000 more at 14 years because of higher ability, the observed return is 22.4 percent, overstating Ann's by 8.5 points.

Worked example

An 18-year-old can earn $54,000 a year as a high school graduate, or pay $8,000 a year for four years of university and then earn $81,000. Both work until 65 (47 years from age 18). Use the annuity factor $\sum_{t=0}^{n-1} (1+r)^{-t} = \frac{1+r}{r}\left[1 - (1+r)^{-n}\right]$.

1. Annuity factors at 5 percent. Here $(1 + r)/r = 1.05/0.05 = 21$, $1.05^{-47} = 0.10095$ and $1.05^{-4} = 0.82270$. For 47 years: $21 \times (1 - 0.10095) = 18.880$. For the 4 years of university: $21 \times (1 - 0.82270) = 3.723$. The 43 working years after university are worth $18.880 - 3.723 = 15.157$.

2. Present values. $PV_{HS} = 54{,}000 \times 18.880 \approx 1{,}019{,}500$. $PV_{COL} = -8{,}000 \times 3.723 + 81{,}000 \times 15.157 \approx -29{,}800 + 1{,}227{,}700 = 1{,}197{,}900$. University wins by about $178,400.

3. At 10 percent. With $(1 + r)/r = 11$, the factors become $11 \times (1 - 0.01134) = 10.875$ and $11 \times (1 - 0.68301) = 3.487$, a difference of $7.388$, so $PV_{HS} \approx 587{,}300$ and $PV_{COL} \approx -27{,}900 + 81{,}000 \times 7.388 \approx 570{,}600$. High school wins by about $16,700. The two are equal at a discount rate of about 9.3 percent, the internal rate of return on university in this example.

4. The stopping rule. Another worker’s locus pays $30,000 at 12 years, $33,000 at 13, $35,970 at 14, $38,488 at 15 and $40,412 at 16. The marginal rates of return are $3{,}000/30{,}000 = 10\%$, $2{,}970/33{,}000 = 9\%$, $2{,}518/35{,}970 = 7\%$ and $1{,}924/38{,}488 = 5\%$. With $r = 8\%$ she completes years 13 and 14 and stops at 14 years; with $r = 6\%$ she also completes year 15.

Exercise: a smaller university premium

If university graduates earned $70,000 instead of $81,000, then at 5 percent $PV_{COL} \approx -29{,}800 + 70{,}000 \times 15.157 \approx 1{,}031{,}200$, which still beats $PV_{HS}$ by about $11,700. A premium of $16,000 a year still pays at a 5 percent discount rate, but only just.

Common mistakes

Traps on exams

• Leaving out forgone earnings. For most students they are the largest cost of schooling.
• Adding up undiscounted dollars. Costs come early and gains late, so undiscounted sums overstate the value of schooling.
• Calling the slope of the locus the rate of return. The slope is in dollars; the MRR divides it by the current wage.
• Stopping where the MRR is zero. The rule is MRR equals the discount rate, not zero.
• Reading the raw wage gap as the return to schooling. It is the return only if workers differ in discount rates alone; ability differences bias it upward.

On the exam

Write both present values with the summation limits, state the decision rule, and list the four things that move it (premium, direct costs, working life, discount rate). For the stopping rule, draw a downward-sloping MRR schedule with years of schooling on the horizontal axis, a horizontal line at $r$, and mark $s^*$ where they cross; a second, higher $r$ line shows that impatient workers stop earlier.

Check yourself

1.

All else equal, which change makes a student less likely to go to university?

1A rise in her discount rate2A rise in the earnings gap between university and high school graduates3A fall in tuition4A rise in the retirement age

Check answer

2.

Which are properties of the wage-schooling locus? Select all that apply.

Select all that apply.

1It slopes upward, because workers must be paid more to undertake costly schooling2Its slope is the extra annual earnings from one more year of school3It is concave, because returns to schooling diminish4Its slope is the marginal rate of return to schooling5Each worker chooses where to place the locus

Check answer

3.

A worker who has finished 12 years of school faces this wage-schooling locus:

Years of schooling	12	13	14	15	16
Annual earnings	$36,000	$40,320	$44,350	$47,900	$50,580

Her discount rate is 7 percent. Ignoring tuition, how many years of schooling maximize the present value of her lifetime earnings?

Your answer (years)

Check answer

Practise more questions on this topic

Sources

1. Becker, G. S. (1964). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. NBER. NBER book page. ↩

2. Mincer, J. (1974). Schooling, Experience, and Earnings. NBER. NBER book page. ↩

3. Statistics Canada, Table 14-10-0020-01, Unemployment rate, participation rate and employment rate by educational attainment, annual (2025, both genders, ages 25 to 54). ↩

4. Statistics Canada, Table 37-10-0045-01, Canadian and international tuition fees by level of study (Canadian undergraduate, current dollars, 2026/2027). ↩