The Myth of Excess Enrollments in College-Becker

 The print media and the blogosphere have many discussions of the high and rising cost of attending college, the debt burden weighing on college students, the fact that the average real earnings of college graduates have risen only slowly during the past 40 years, and the difficulty young college students are having in getting good jobs. The conclusion frequently reached is that too many high school graduates seek a college degree, and that these graduates have been sold a bill of goods about the value of a college education.

 The facts cited are generally correct, but the conclusion about the low value of going to college is completely wrong. The fallacy stems from believing that earnings from a college education determine the benefit of a college education. The truth is that the benefit is determined by the earnings from a college education relative to what earnings would be if a person stopped her education after high school. A first approximation to this gain in earnings for the typical person is given by the difference between the average earnings of college and high school graduates.

 A recent study by the Pew Research Center conveniently brings out some facts that have been known, but are worth repeating. The study looks at changes over time in the ratio of the earnings of the average college graduate aged 25-32 relative to the average earnings of high school graduates of the same ages. They divide successive cohorts into Millennials (born after 1980), Generation Xers, Baby Boomers, and older Silents (b orn between 1928 and 1945). The study finds that young college graduates earned on average about 24% more than young high school graduates in the Silents generation, but this percent difference increased to about 47% in the Boomers generation, and now young Millennial college graduates are earning more than 60% than young Millennial high school graduates.

The study understates the trend in the earnings of high school graduates by including persons with a graduate equivalence degree (GED), whose numbers have grown in importance over time. Studies by Heckman and others show that the GEDers should be treated as high school dropouts, not high school graduates, since their earnings are similar to those of dropouts.

 The recession hit the earnings and employment of college graduates, but it hit even worse the earnings and employment prospects of high school graduates. As a result, the recession actually increased the gain from graduating from college.

 While the price level adjusted average earnings of college graduate grew slowly over the 45-year period of the Pew study, the average real earnings of high school graduates and dropouts actually fell over this long time period. This is why the gap between earnings of college and high school graduates grew by so much. Graduating from college paid off very well not in absolute terms but relative to the alternative, which is the only way to measure the gain from college.

 Of course, the change in the cost of attending college also has to be considered before one can conclude that college is a good investment. And college tuition has grown at an unusually rapid rate over the past 35 years. Nevertheless, college remains a good investment after netting out the cost of tuition from the higher relative earnings of college graduates. The Pew study also asked young Millennial college graduates whether they felt college was worth the significant financial cost. About 90% of these young graduates said college had either already paid off (83%) or will pay off in the future (8%). Such confidence in the value of their college degree even holds for the two-third of these Millennials who borrowed money to help pay for their schooling.

 Over the past 45 years the fraction of young persons who graduate from college has greatly increased, although the rate of increase slowed during past 20 years. That the returns from college increased even though many more young persons are completing college implies a powerful growth in demand for college graduates over this time period.  The growth in demand for college graduates is related to the development of the Internet and other technologies, the growth of the service sector, and globalization. High school graduates can no long count on getting good jobs in manufacturing.

 The study also shows that the fraction of college graduates with student loans grew quite rapidly over time as tuition rose rapidly and as government-supported loans became more readily available- 66% of Millennials took out loans vs. 43% for Baby Boomers. The burden of these loans is usually exaggerated since most graduates can easily finance their loans from the higher earnings they receive. Graduates who borrowed a lot and are earning relatively little are the ones who face a loan burden. The best way to help such college graduates is to have a repayment system whereby individuals who earn more pay back more, while those who earn less pay back less.

Such an income-contingent loan program works best when graduates face risk to their future earnings that they cannot predict very well. As a way of dealing with risk it works not so well when future earnings are more predictable. In particular, it favors graduates in low paying fields, like K-12 teaching- and hurts graduates in  well-paying fields, like business or finance. On the whole, an income-contingent system is probably better than the present fixed repayment system, but it is not a panacea.

Comments

[Mattnotda]

Reducing principal of student loans based on income will provide some pretty perverse incentives. Students should consider the cost of their education when deciding how much to borrow, or whether to go into that field at all. Income-contingent loans will both increase the cost of education in the fields that don't pay as well, and may well increase the number of people who go into those fields, further depressing pay in those fields.

[Terry Bennett]

College is the new high school, today's baseline of achievement, and this change has been market driven. Employers have imputed value to a college education by implementing policies such as, "We won't hire you to sweep floors unless you have a bachelor's degree." College is an obstacle course, and a degree is proof of an individual's wherewithal to navigate it - to get up and show up for four years and meet a goal. Whether he learned anything is of little consequence. It's just one more bureaucratic requirement, like a vaccination.

A rule is substitute for thinking, and through this rule HR departments are relieved of the task of looking for diamonds in the mud - and there no doubt are some very talented people lacking degrees who could contribute if given the chance, but the transaction cost of finding them is probably prohibitive, and so employers have opted for this shortcut en masse in recent years. It also means you can get by with less talented HR people who no longer need to have an eye for talent but merely need to check paperwork. Government is one of the biggest proponents of this approach, which further objectifies candidate search and shields against claims of discrimination. This is also why there may be a certain amount of skill to be found in the government workforce, but notoriously little talent - it is not rewarded, and so tends to go elsewhere.

Colleges meanwhile have reaped the windfall of this systematic attempt to exclude the losers from the workplace, as they have morphed from providers of a luxury into providers of a necessary product, and they thus can and do charge more, in response to market conditions. Colleges have also overbuilt, and some of them have taken it on the chin, notably law schools, as demand fell during the fiscal meltdown.

I think the issue is thus more aptly framed not as the value of having a college degree (as distinct from a "college education", which is a diaphanous hypothetical), but rather as the cost of not having a college degree.

[Jack]

Terry, you nailed it on this one! Yes! Employers all too often use a costly college education as an indicator of the literacy that both the college grad and many of his school chums would have coming out of HS.

Another similar effect is that of the 18 year old HS grad not being as mature as the mid-20 something college grad.

Again indicative of too many years of a labor surplus that I'm increasingly convinced is structural, will be with us permanently and that public policy is going to have to deal with.

It seems the legal/liability paranoia plays into it as well. For example if a woman who has raised several kids and took care of ailing parents too wanted to work in elder care but lacked the Certified Nurse Assistant qualification, somewhere along the way someone is going to say "But if "something happened" it would be better (less liable) for hiring the certified person...... besides there are plenty of those with certs to chose from."

[Jack]

Other factors likely to have affected the different percentages of today's millennials vs boomers of the 60's and 70's:

Relatively higher numbers of Viet era volunteers and draftees having VA assistance after a two or four year hitch.

The huge increase in college cost inflation juxtaposed against a falling min and lower end wage that makes taking a part time job a nearly worthless waste of time.

Some, cleverly working the system: Why not borrow at low student rates for college while using money saved "for college" to buy a house (perhaps to rent rooms to fellow students) buy a car or let it ride in the stock market.

[Eric Rasmusen]

It's also relevant that an employer who uses an IQ test in hiring will probably be sued for racial discrimination, but an employer who requires a college degree--- entrance to which requires an IQ test (the SAT or ACT) will not. We are using college as a super-expensive IQ test.

(How is it that colleges get away with using an IQ test for admissions despite disparate impact but for-profit corporations do not? Ask the Harvard and Yale Law School alumni.)

[Jack]

Plus -- I kinda agree with your point but the "Aptitude tests" are not really IQ tests. While it's easier for a "quick study" to get a high or perhaps THE highest score applicants can study to improve their scores.... in fact there is a whole "prep" industry as many send their kids to SAT prep courses.

Harvard and Yale? Ha! When our kids were of college age we were passing around a book "Gatekeeper" that tells how one gets into "the Ivies". The most powerful of "affirmative action" is what we saw as GWB, who was turned down from a Texas U. gained admission to Yale; having an alumni as a parent, and ha! if the parent funded a chair or wing, I suspect an amoeba might make the cut.

There was a long article, maybe in the Atlantic? some years ago on "How I gave up an education by going to Princeton" that echoed some comments of a good econ teacher I had years ago. The prof got a sabbatical to teach as Princeton for a year. I asked what it was like teaching at the elite school. His answer was that WE were a far more interested and questioning student body. At Princeton, he lamented, most of the students were "fast tracking" Ha! perhaps to those WS firms that recently crashed or big law firms and ALL they wanted to know is how to get a top grade and move on.

Ha! who has been the most productive? Those carving out family fortunes on WS for polluting the world with toxic assets and lying about bond ratings or about anyone moving along a helping to create a solid product at an honest price?

[Gertrud Fremling]

I thought that Jack brought up some excellent points. Especially in the many female-dominated professions that deal with child and elder care, elementary education, psychology et.c. you need certification based on some type of formal education. No matter how much experience or informal studies, there really is no good way of demonstrating that you would make a great worker.

BTW, that may well be a reason why women nowadays make up a majority of college students. Without the formal qualifications, women cannot get into the types of jobs they like. In contrast, more male-dominated areas, such as computer science, management, do not have as many strict educational restrictions, even at higher levels. We can be happy that Bill Gates was not required to have a degree in computer science and business to start a company!

And, yes, it is indeed ridiculous that employers cannot administer tests for fear of being sued.

[Jim McCabe]

Prof. Becker is surely right that willfully foregoing a college degree in a terrible idea in this market. The unanswered question is whether or not subsidies to higher education have increased supply to the point where, as Terry notes, "college is the new high school," and therefore creates an expectation among employers that the minimally competent have checked the box of a college degree. There are many people performing jobs unrelated to their college studies who could easily have performed those jobs without the degree, with the only barrier being that they don't get the chance. We have an office manager (in her late 50's) who has had trouble in the labor market because she does not have a degree, but luckily, she gained experience at a time when a degree was not the golden ticket to the job market that it is today. I contend that subsidies have contributed to a dead-weight loss in expenditure on education by making degrees mandatory for jobs where they are not necessary, almost like occupational licensing on steroids.

[Forteology]

The Red Queen effect.

[CharlieAdam15]

What can not be stopped enthusiasts. http://www.friv100play.com