Thursday, May 13, 2010

Does Credential Inflation Explain Some of the College Wage Premium?

by Daniel L. Bennett

Lately, I've been doing some thinking about the college wage premium and the growing number of college graduates. Advocates of higher ed have long espoused that college is the best investment that one can make, and that the returns to this investment are substantial. This line of reasoning has been continuously espoused by proponents for increasing the number of students going to and completing college, with folks implying that the labor market increasingly demands more college graduates. The evidence doesn't seem to support this claim.

The Bureau of Labor Statistics identified the 30 occupations that will experience the most numeric job growth between 2008 and 2018. Only 7 of the 30 occupations require a bachelor's degree or higher, with 5 of the top 6 occupations requiring on-the-job training only. According to BLS, these 30 occupations will create more than 7.3 million jobs by 2018. 2/3 of these jobs (nearly 4.9 million) will require no formal postsecondary credential.

So where exactly are all of these new college grads going to find jobs if they are not in fact in demand by the labor force? My hypothesis is that the US labor force has been and will continue to experience credential inflation. Jobs which in the past didn't require a postsecondary credential (and likely still don't), will increasingly be filled by those with college degrees because there is an excess supply of them. Why hire a high school grad when you can hire a college grad for roughly the same cost?

I think that this phenomenon helps explain why administrative, customer service, retail and other relatively low skill jobs are increasingly staffed by persons with a college education. It is not that these kinds of jobs require someone with a degree, but rather that college grads are willing to take these kinds of jobs. I think that credential inflation plays at least some role in explaining the wage college wage premium.

Credential inflation is not only bad for those without a college credential, as they are pushed out of jobs for which they previously were able to do, it is also bad for those with a college degree who spent a considerable amount of time and money to get that degree, only to wind up in a job for which the degree wasn't really necessary. In other words, the explicit and opportunity costs are high to seek a college degree.

The counter argument is that college is not only an economic investment, but that there is also the socialization and consumption value that needs to be considered. This is true, but the problem with this line of reasoning is that wage earners should not be taxed so that young people can have a good time and make new friends. Socialization and consumption are experience goods that individuals choose to purchase and as such, should be paid for by the benefiting party that voluntarily elects to purchase them.

3 comments:

Frank the Underemployed Professional said...

I hope that CCAP will please examine the scam that is occurring in legal education. This industry is deserving of a devastating expose and it is more than ripe for it. Law school is probably the most extreme example of economic waste in higher education because it is very expensive and the law schools have been producing about twice as many graduates as the nation's economy can comfortably absorb and employ for about three decades now. (The number of law schools and students jumped dramatically in the mid-Seventies.) In recent years, they have probably been producing three or four times as many graduates as what the nation needs and perhaps 10 times as many during the Great Recession.

Also, law school tuition has almost doubled in the past ten years with the yearly tuition having reached over $45,000/year at the very top schools and with many lower-tiered schools (whose diplomas have far, far less employment value) also charging $30,000-$45,000/year. Furthermore, law school graduates claim (and even professors will admit) that law school only teaches theory and does not prepare people to open their own solo practices or to work at small firms. (The model has been that people would receive actual “how to” training at established and sizeable law firms.)

So, every year the law schools pump out thousands of heavily indebted, unemployed or underemployed-and-involuntarily-out-of-field law school graduates who have $100,000-$200,000 worth of non-dischargeable (in bankruptcy) student loan debt attributable to the cost of attending law school (after also factoring in housing and living expenses). Many may also have undergraduate student loan debt. Those who cannot obtain meaningful positions in the legal profession shortly after graduation suffer from being regarded as losers by potential employers and thus essentially lose almost the entire value of their college educations. These poor souls’ lives have been effectively destroyed and they will spend their lives as members of an indentured educated underclass. Many of these student-loan-burdened individuals will never be able to afford to purchase a house or to have children.

Detractors have been referring to legal education as a “scam” because the law schools (with the tacit sanction and approval of the American Bar Association) have been publishing arguably misleading (if not fraudulent) employment statistics showing that a high percentage of survey respondents are employed and earning high incomes after graduation. Anyone who has graduated from law school in the past two decades knows from anecdotal evidence that these statistics are at best inaccurate. (Recently the President of the California Bar Association publicly acknowledged this. See: http://tinyurl.com/2fz28ob ”There is notoriously unreliable self-reporting by law schools and their graduates of employment statistics.”)

This is not merely an economic problem for our society, but also a humanitarian problem. These law school graduates are often intelligent, hard-working, and ambitious, but because they made poor decisions when they were na├»ve 21 year olds who had been indoctrinated since Kindergarten with the notion that higher education is a guarantor of economic success, many will suffer lives of shame and poverty. The only solution is to close about 60% of the nation’s law schools.

A small but growing number of “law school scam bloggers” have been chronicling this mess and posting reports of related news reports. You can find links to this law school scamblogging community here:

http://JDScam.blogspot.com

If your organization becomes seriously interested in investigating this further, I am sure that the scambloggers would be happy to help. Also, as a starting point, you might consider contacting Vanderbilt law school professor Herwig Schlunk (http://law.vanderbilt.edu/faculty/faculty-detail/index.aspx?faculty_id=188) who wrote a paper arguing that law school only pays off for 10% of all graduates (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1497044)

Overlook said...

I forgot you had comment moderation on.

Overlook said...

The teacher's union and the Department of Education seem to believe they need a bailout - even after receiving billions from the current administration's so called stimulus bill (The "American Recovery & Reinvestment Act). If they get their bailout (which they will unless the repub's somehow block it), what will they do after they go through that money. Where does it stop?

I'm wondering if college tuition is going to skyrocket when states start slashing their budgets. This may also reduce the population of new students entering college.

Should be interesting to watch it all unfold.

Now to get back on topic, I'm no conspiracy theorist. However, if employers are requiring degrees for jobs that do not really need a degreed individual, they can effectively reduce labor costs - or lower the mean salary for all professions. When I worked out in California, I could not believe how much money I was making.

Today, if I do a job search on Monster.com for the positions I held at Boeing, the income (gross pay) is much, much lower than it was 17 years ago!