The Economic Impact of College Graduates on Local Economies

A college education has its personal advantages, but it’s critical to thriving cities as well.

Image f11photo / Shutterstock.com
f11photo / Shutterstock.com

It’s no secret that universities and colleges are major factors in the economic development of cities and metro areas. Stanford is often credited as the innovative spur to the Silicon Valley, while MIT is seen as a catalyst for startups and high-technology in and around Greater Boston. My own research considers universities to be creative hubs for America’s leading knowledge regions. At the same time, I have also argued that it is a mistake to pose colleges and medical centers—so-called “eds and meds”—as cure-alls for distressed local economies. Still, there is no doubt that their sheer size and scale create substantial effects on local economies.

A study by the economist Jonathan Rothwell of the Brookings Institution’s Metropolitan Policy Program takes a detailed, data-driven look at the effects of college and university graduates on local economies across the U.S. While these economic effects obviously depend a great deal on how good a metro is at retaining local alumni (a subject I’ll explore in an upcoming post), Rothwell’s initial research helps to outline which metros are currently benefiting the most. To get at this, he uses data from the Bureau of Labor Statistics’ 2014 Consumer Expenditure Survey to identify consumption levels in the U.S. economy broadly and across metro areas. Interestingly enough, he finds that a whopping $3.4 trillion a year—amounting to 40 percent of pre-tax income and nearly half (49 percent) of all spending—goes toward local goods and services.

The table below from Rothwell’s study shows the average income and spending for households with various educational attainment levels in 2014. Households with a college graduate as the highest educated member spend nearly $13,000 more each year locally than households in which the highest educated member is a high school graduate.

Rothwell finds that since college-educated households accrue more income, they are able to spend more money on the local economy. This is not to say that highly educated citizens are deliberately channeling more money than high school graduates into the local economy, but rather that their sheer spending power causes them to spend more than twice as much on local goods and services.

When you factor in how much these households spend over a lifetime, the disparity becomes even more pronounced. Using data from the 2013 American Community Survey (ACS), Rothwell calculated that the average college graduate spends $278,000 more on local goods and services—in addition to $44,000 more on state and local taxes—than the average high school graduate. Even someone with an associate’s degree spends around $81,000 more.

Rothwell also finds a significant difference between the type and quality of colleges and universities that produce local graduates. Here he distinguishes not only between two- and four-year colleges, but between low value-added and high value-added institutions (those that generate the most economic value for their students, regardless of socioeconomic advantage). In doing so, he finds that graduates from high value-added four-year colleges add about $265,000 more to local economies per graduate than those from low value-added four-year colleges. Based on this, he suggests that local economies—and even entire states—stand to gain significant economic and tax benefits from alumni of high value-added institutions.

To bolster these findings, my Martin Prosperity Institute (MPI) team used Rothwell’s 2013 data to map the economic value (in dollars) added by four-year college graduates for metros across the United States. Metros with the highest value-added colleges (those that are best at generating alumni income) are shown in purple.

The map features dark purple along the Boston-New-York-Washington Corridor and across Northern and Southern California, as well as in the Pacific Northwest, Arizona, Utah, parts of Texas, and areas of Illinois and the Dakotas in the Midwest. The following table shows the large metros with the highest and lowest value added from their graduates (i.e. the average dollar amount added to alumni salaries on a per student basis).

Large Metros with the Most and Least Value Added (Four-Year College Graduates)

Metros with the Most Value Added Value Added
San Jose-Sunnyvale-Santa Clara, CA $13,422
Boston-Cambridge-Quincy, MA-NH $11,804
Denver-Aurora-Broomfield, CO $10,985
Salt Lake City, UT $10,861
Washington-Arlington-Alexandria, DC-VA-MD-WV $9,881
Hartford-West Hartford-East Hartford, CT $9,124
Sacramento-Arden-Arcade-Roseville, CA $8,819
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD $8,614
New York-Northern New Jersey-Long Island, NY-NJ-PA $8,280
Phoenix-Mesa-Glendale, AZ $8,159
Metros with the Least Value Added Value Added
Columbus, OH $182
Cincinnati-Middletown, OH-KY-IN $295
Louisville-Jefferson County, KY-IN $314
Kansas City, MO-KS $1,103
Indianapolis-Carmel, IN $1,816
Charlotte-Gastonia-Rock Hill, NC-SC $1,868
Minneapolis-St. Paul-Bloomington, MN-WI $2,036
Detroit-Warren-Livonia, MI $2,306
Memphis, TN-MS-AR $2,307
Chicago-Joliet-Naperville, IL-IN-WI $2,894

Across all metros, those with universities that added the most to alumni salaries include places like Provo, Utah (home to Brigham Young University); Ithaca, New York (Cornell University); Charlottesville, Virginia (University of Virginia); and San Louis Obispo (Cal Poly) and San Jose, California (with Stanford University nearby). Conversely, universities in metros like Santa Fe, New Mexico; Honolulu, Hawaii; Elkhart, Indiana; Grand Rapids, Michigan; and Redding, California, added the least to alumni salaries—all of them with negative dollar values.

But which cities and metro areas alone gain the most from their college graduates? To answer this question, my team also mapped Rothwell’s data on the average local spending of four-year college graduates.

Most of the dark purple on this map can be found in Southern California and the Pacific Northwest, along with Colorado and New York. The following table shows the large metros with the most and least average local spending of four-year college graduates:

Large Metros with the Most and Least Local Spending (Four-Year College Graduates)

Metros That Spend the Most Average Local Spending
San Jose-Sunnyvale-Santa Clara, CA $15,400
New York-Northern New Jersey-Long Island, NY-NJ-PA $13,937
Denver-Aurora-Broomfield, CO $13,088
San Francisco-Oakland-Fremont, CA $12,958
Seattle-Tacoma-Bellevue, WA $12,924
Los Angeles-Long Beach-Santa Ana, CA $12,649
Houston-Sugar Land-Baytown, TX $11,905
Riverside-San Bernardino-Ontario, CA $11,857
Atlanta-Sandy Springs-Marietta, GA $11,530
Detroit-Warren-Livonia, MI $11,530
Metros That Spend the Least Average Local Spending
Phoenix-Mesa-Glendale, AZ $3,363
Hartford-West Hartford-East Hartford, CT $5,447
Virginia Beach-Norfolk-Newport News, VA-NC $5,487
New Orleans-Metairie-Kenner, LA $5,682
Providence-Fall River-Warwick, RI-MA $5,807
Rochester, NY $6,380
Buffalo-Niagara Falls, NY $6,390
Oklahoma City, OK $6,517
Tampa-St. Petersburg-Clearwater, FL $6,577
Sacramento-Arden-Arcade-Roseville, CA $6,884

Metros whose graduates spend the most on the local economy are mainly superstar cities like New York and L.A. and knowledge and tech hubs like San Jose, San Francisco, Seattle, and Denver, as well as the energy hub of Houston. Perhaps surprisingly, Detroit makes the list at number ten. On the flip side, metros whose graduates spend the least on the local economy are mainly sprawling Sunbelt metros like Tampa, Phoenix, and New Orleans or older, declining Rustbelt metros like Rochester and Buffalo.  

Naturally, Rothwell suggests that cities, states, and metros can improve the economic impact of their colleges and universities by boosting graduation rates and encouraging higher local retention of graduates, among other things. In my next post on this subject, I’ll look at how metros across the U.S. are doing at keeping their graduates close by.

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