US Economics undergraduate majors typically take four directions: straight to a job, to Law School, to Economics graduate studies or to an MBA (usually after a few years on the job). Law schools have proliferated and produced a glut of students which is clearly leading to starting wages that do not justify the cost of studies. Is it then worth taking on an MBA as an alternative?
Peter Arcidiacono, Jane Cooley and Andrew Hussey tackle this question with data from the GMAT, the standard test used to select MBA candidates. What is particularly interesting in this data is that it contains students that did not pursue the MBA, as well as what potential students were earning at the time they were taking the test and after studies.
So what is an MBA worth? A raw regression with few controls gives a return of 9.4% for men and 10.4% for women. Add controls for ability, returns drop to 6.3% and 6.7%. Or use fixed effects, and returns are only 4.8% and 3.8%. These numbers are truly not impressive given cost and supposed prestige of those programs. Which begs the question: are all MBA programs equally valuable?
For a school ranked outside the top 25, a full-time or part-time MBA program is essentially useless, in particular after controlling for ability. Executive programs have a return in the order of 11%. Going to a program ranked 11-25 increases returns by 27% (men) and 14% (women). Go to a top 10 school, and you can add another 6% or 28%.
Remember where the data comes from: people who took the GMAT and some decided not to go for an MBA. Is it because they realized they where not getting into a top school, so they skipped the MBA entirely, thereby making essentially the same return as those going to a lower ranked school? I call this an indifference point between going to school or not. So at the margin, going to a school outside the top 25 or not is equivalent.
What I conclude from this? Most MBA programs are not worth the time. Only the top programs give significant returns. This implies also that the top programs will continue to attract students without bounds. Harvard now graduates about 900 MBAs a year...