Month: December 2008

Career Rankings by ROI and salary

A college education has many rewards, but it is primarily an investment, and its return can be calculated by measuring the increase in salary that it brings. While college has many intangible benefits that are difficult to measure, the NPV and IRR of future income can be used to measure its rate of return. Unfortunately, very few comparisons have been done to rank career paths on these metrics.

In the table below, I build on my previous research by ranking 22 different career paths by return on investment. The careers are ranked by Net Present Value and rate of return (methodology explained at bottom). The career rankings take into account numerous factors for each career, including the length and expense of education, salary potential, and unemployment risk.

Career ROI Rankings:

Career Average Salary NPV After-tax earnings (lifetime) Rate of Return
1. Law $124,230 $186,200 $4,709,000 15%
Attorneys rank high on the list since their education is complete just three years after college, and they can step right into six-figure salaries.
2. Chemical, Petroleum, Nuclear Engineering $85,000 $174,100 $3,271,000 19.3%
Petroleum and Chemical engineers step into starting salaries over 60k, leading to a high return on a 4-year education.
3. Pharmacy $98,960 $173,305 $3,833,000 16.5%
Pharmacists typically must complete a six year program before starting work, but high demand for pharmacists enables them to move directly into $90k per year positions upon graduation.
4. Computer Science $83,160 $170,000 $3,335,000 19%
Computer science grads start work immediately after college with salaries above 50k, giving them a fast payback on their investment, but lifetime earnings potential is lower than in some professional fields.
5. Medicine – Specialist $190,000 $148,000 $5,994,000 12.75%
Doctors have always enjoyed good incomes, but their educational investment is so high that it reduces their educational ROI more than is commonly realized.
6. Accounting $69,500 $144,900 $3,038,000 17.9%
Accountants can start work right after college, and their pay increases considerably once they’ve completed their CPA certification.
7. Stockbroker $90,470 $125,600 $3,194,000 16%
Stockbrokers start with a low salary, but can build up to a comfortable 90k with time and effort.
8. Civil / Mechanical Engineering $75,200 $112,000 $2,860,000 16.0%
Civil and Mechanical engineers tend to lag engineers in other fields in terms of income and career ROI.
9. Medicine – Primary Care $161,500 $108,900 $5,246,000 12.2%
Primary Care doctors have an educational investment almost as high as medical specialists, but do not receive commensurate salaries.
10. Physical Scientist (Astronomy, Physics, Chemistry, etc) $78,100 $108,600 $3,177,000 14.7%
Physical scientists have to complete eight years of education before moving into a full time research or academic position.
11. Airline Pilot $148,410 $106,241 $3,279,000 13.75%
Airline pilots must work for years at low paying regional air or charter jobs before making it to a major carrier, but the final payoff is a relatively high salary and reasonable working hours.
12. Nursing (RN) $62,480 $106,170 $2,598,000 16.75%
Nurses can finish training in as little as three years, and earn relatively good salaries right from the start, with job prospects virtually anywhere in the country.
13. Police Officer $50,000 $78,000 $1,748,000 9.6%
Police Officers are well compensated relative to the length of their education, but take risks not associated with most other careers.
14. Biological / Life Scientist $69,175 $71,720 $2,812,000 13.3%
Biological scientists earn lower salaries than their colleagues in physical sciences, but have to undergo the same amount of training.
15. Financial Analyst $81,700 $54,000 $3,042,000 12.20%
While completing an MBA can nearly double a financial analyst’s salary, the high tuition and lost earnings diminish the rate of return.
16. Insurance Underwriter/Appraiser $57,795 $54,000 $2,342,000 13.20%
Insurance underwriters and appraisers enjoy a relatively steady income after college.
17. Architecture $73,650 $50,000 $2,710,000 12.2%
Architects have decent salaries in the long run, but they must first complete a five year Bachelor’s program, and then spend several years as interns before becoming full-fledged architects.
18. Human Resources Specialist $56,740 $25,000 $2,164,000 11.50%
HR Specialists start working quickly, but their salaries don’t rise as significantly as in other careers.
19. Graphic Design $45,340 $18,220 $1,994,000 11.2%
Graphic Designers can start work right after finishing college, but competition for positions is high, keeping salaries down.
20. Psychologists $70,000 $11,000 $2,373,000 10.5%
Psychologists’ long training period and low salary compared to MDs decreases returns significantly.
21. Teaching (K-12) $52,450 -$6,630 $1,930,000 9.6%
Teachers are not particularly well compensated in the US, and since their starting salaries are particularly low, the NPV of an investment in a teaching career is actually negative.
22. English (PhD) $60,000 -$15,250 $2,165,000 9.25%
At the bottom of the rankings are Humanities majors. If an English or Humanities PhD candidate tells you that they didn’t go into it for the money, they’re not lying: this career path has a negative return on investment in income terms.

Annotated spreadsheet with all calculations: HTML | XLS with formulas

Definition of Terms:

NPV: This is the Net Present Value of the student’s investment in education, based on a 10% discount rate. 10% is a common rate of return expected for long-term investments, and it helps provides a fair benchmark of the value of each career path.

IRR: This is the Internal Rate of Return of the educational investment. IRR tends to favor shorter time horizons, so shorter educational paths like engineering are rewarded when measured via IRR.

Lifetime Earnings: This is a simple sum of the lifetime after-tax earnings of each career path from age 18 through age 65.

Methodology:

All salary data was taken from the BLS May 2007 Occupation Employment and Wages Estimates. The BLS data measures only base salaries, and does not include bonuses, profit-sharing, or other similar forms of compensation in its estimates. College was assumed to cost $20,000 per year (this sounds low, but is an average for public and private colleges, after all scholarships, grants, and student work are taken into account). Professional school costs, and graduate and resident stipend data were sourced variously, and are noted in the spreadsheet. Inflation at 2% and progressive taxation are also accounted for in the calculations.

The rate of return for each field was calculated by determining the IRR for each field, taking into account the cost of college and measuring total after-tax gains from age 22 to age 65. The NPV of each career path was also calculated with a discount rate of 10%. Finally, lifetime after-tax earnings were calculated as a simple sum to provide another measure of earnings potential.

Posted on by praveenghanta 21

Stimulus Plan Ideas

I’ve been thinking about President-elect Obama’s proposed stimulus plan lately, as it represents one of the larger policy decisions of the coming year. Most economists agree government stimulus that some form of is necessary to prevent a deflationary economic environment, and to improve economic sentiment. But what criteria should we use to judge fiscal stimulus spending, and are there any good ideas out there that haven’t been considered?

Stimulus Plan Criteria:

1. Speed: Any stimulus spending needs to occur quickly in order to boost the economy. Projects which don’t hit the ground til 2010 don’t meet this criteria.

2. Spent, Not Saved: Ideally, 100% of any stimulus funds should be spent on consumption of goods and services to kick-start the economy. Tax rebate checks, particularly to the wealthy, perform poorly in this regard because a larger percentage of the funds will be saved.

3. Return on Investment: Projects with a measurable return on investment, whether in economic growth or otherwise, are preferable to spending that has no longer term benefit.

With these criteria in mind, here are some fresh ideas that I think deserve consideration:

1. Convert school buses and bus fleets to CNG. This would decrease diesel emissions near children, and also reduce US dependence on foreign oil, while providing an immediate boost to the auto manufacturing sector. Particulate pollution kills tens of thousands of people annually – why not spend to improve public health and reduce oil dependence at the same time? $25 Billion would enable the conversion of half the nation’s school bus fleet.

2. 100% tax credits for energy efficiency in homes and small businesses. Instead of handing out tax rebate checks, which aren’t spent in full, why not pay homeowners and businesses to improve energy efficiency? President-elect Obama has made a similar proposal regarding federal buildings, but tax credits would lead to faster spending since consumer and small businesses can move more quickly. $50 Billion would retrofit 50 million of America’s single family homes with energy saving modifications.

3. Increase funding for basic science research. The great economic booms of the 80’s and 90’s were driven by technological advances like the personal computer, the internet, and pharmaceutical technology, and these technologies had their early beginnings in basic research. Increasing basic research and grant expenditure at the NSF, NIH, DARPA, and other agencies would employ thousands of new college graduates and researchers while accelerating the path to future technological breakthroughs. Doubling the NSF and DARPA budgets would cost $10 Billion, while another $5 Billion would add to NIH’s budget.

Funding these ideas in total would cost $90 Billion. While federal spending at this level would crowd at private investment in normal circumstances, today’s circumstances have drastically reduced private investment across the board. If the Federal government is planning to spend close to a trillion dollars on stimulus, shouldn’t we fund high return projects like these?

Posted on by praveenghanta 0

What’s the Real Federal Deficit?

The federal deficit for the past ten weeks alone is now 650 Billion dollars, in addition to a fiscal 2008 deficit of $1 Trillion.

Since the US government fiscal year ended on 9/30/08, the federal debt has increased from $10,024 Billion to $10,656 Billion (as of 12/9/08).* The federal debt increased by $1 Trillion over the 12 months ending 9/30/08.

As I’ve previously noted, measuring the Federal deficit by looking at growth in the Federal debt provides a clearer picture of budget shortfalls than the officially announced numbers, which hide significant expenditures, and paint too rosy a picture.

A large part of the recent increase in the debt can be tied to the Treasury Department’s various stabilization and bailout initiatives, including the TARP and other programs. President-elect Obama plans to add a significant dose of fiscal stimulus to the Treasury and Federal Reserve efforts, driving the deficit up by another 500 Billion to one trillion in the next year. While current circumstances do call for aggressive action, the government should take care not to exacerbate our economic problems by trying to roll the clock back to 2006. Lowering mortgage rates for new home purchases, for instance, provides an incentive to create and buy more of a product that is already in a state of massive over-supply.

When the bad times end, we’ll have to start paying these debts back. Let’s hope President-elect Obama and his team spend their stimulus money on projects with tangible return on investment, and not just on make-work programs.

 

* A significant portion of the increase in deficit spending is being used to buy financial institution shares and various commercial debt instruments, which might be thought of as investments. Nonetheless, the federal debt grows when we borrow, even if we use the money to buy investments. This holds true for personal balance sheets, corporate balance sheets, and for the federal government as well. The federal government has a particularly poor record of decreasing the size of its debt, so I believe it’s fair to regard any excess borrowing as a deficit.

Posted on by praveenghanta 4

Level the Playing Field for Mass Transit

President-elect Barack Obama announced a massive public works program this weekend to rebuild America’s infrastructure, with investments in transportation, energy efficiency, and schools planned.

Obama could further his fiscal stimulus and infrastructure program by leveling the playing field between road and mass transit investments. When the Interstate highway system was created, the federal government provided 90% of the financing, requiring states to pitch in the remaining 10%. In contrast, most transit projects in the US received little or no federal funding until the 70’s, and currently receive 60-80% in federal financing. In addition, transit projects have to meet steep qualification requirements before being funded, while states are provided lump sum funding for road projects which can be used with much greater discretion.

Why not level the playing field by allowing states to use federal transportation funding as they see fit, without explicitly allocating it for roads or mass transit? States with large urban areas could then focus on large-scale transit projects, while rural states could focus on traditional road construction. This blog has consistently advocated against subsidies of all kinds, but since most major transportation projects are funded via the DOT, it makes sense to enable states to spend the money according to their needs.

In the current economic environment, fiscal stimulus is advisable, and fully funding mass transit projects will help advance the new administration’s energy policy as well. Providing equal funding for both mass transit and roads should be an easy win for the Obama administration, and I hope that the new President takes this step.

Posted on by praveenghanta 0