Markets Speak: Universities Be Aware

By Richard Vedder

In my book Going Broke By Degree published a few years ago, I argued that the rapid growth in costs of universities was not substainable in the long run. I also argued that universities have been able to saddle people with higher tuition bills in part because of the rising premium associated with brain-related work as opposed to work dependent on physical skills.

Whiz Kid Matt Denhart and I have been looking very closely at the differential earnings between high school and college graduates, and we find something sobering to the colleges who have counted on a rising differential to validiate big tuition fee hikes. We observe that in 2005, the average earnings differential of male workers employed full-time year round were actually slightly smaller in percentage terms than in 2000. The same is true of females.

It is not crystal clear that a trend is beginning. Five years is a short period, and a drop in the differential from 2000 to 2003 was partly offset by a rising differential from 2003 to 2005. But throughout most if not all of the era from 1970 to 2000, at any date the observed differential was greater than it was five years earlier. This is consistent with some casual evidence showing that some occupations not requiring a college degree --plumber and electrician, for example --are paying very well indeed, and that disdain for these occupations has led to shortages of workers and thus high pay. As college costs rise, but the financial benefits stay constant or even decline, the perceived rate of return on college will fall.

That, in turn, will lead students to become more discerning about where and whether to go to college, making them a bit more price conscious. That is actually a good thing. The credentialling advantages of colleges is taking a bit of a hit as more employers realize that perhaps a college degree is pretty loosely correlated with worker productivity.