The Diminishing Economic Advantage of a College Degree

by Richard Vedder

“Necessity is the mother of invention,” Plato allegedly said. The “necessity” of changing economic circumstances will, in my opinion, force universities and policy makers to reconsider the way we certify that people have achieved any given level of competence and skill. One “necessity” that colleges will soon have to face is that the economic advantages conferred by their bachelor’s degrees are starting to erode.

Take employment security. In 1970, in the era before Pell Grants, large scale federal student loans or the idea that “everyone should have some post-secondary education” was fashionable, the unemployment rate among four year college graduates was only about one-fourth that of the general population. If you were a college graduate, you had relatively few worries about not obtaining or losing a job -- the unemployment rate was a paltry 1.3 percent.

Fast forward four decades to today. In April 2010, the Bureau of Labor Statistics tells us that the unemployment rate for individuals with at least a bachelor’s degree was 4.9 percent –about one-half the overall unemployment rate. About one-third the job security advantage, as measured by unemployment rates, of going to college has been wiped out. And this is not an artifact of the current weak state of the economy. In the 1982-93 downturn, when overall unemployment rates were actually slightly higher than today, the college unemployment rate was sharply lower (well under four percent).

This should not be surprising. Suppose we had a world where every adult had a bachelor’s degree or more. The unemployment rate among college graduates would, by definition, equal that of the general population. Rising college attainment mathematically almost assures that the college graduation job security advantage will diminish if not disappear. This leads to still more credential inflation as individuals seek to demonstrate their distinctive qualities: will garbage workers in 2050 need a Ph.D. in sanitary engineering to get a job?

The standard argument is that “college graduates are more productive persons, and the income differential associated with four year degrees has risen over time.” That argument’s validity is increasingly questionable, again I think a consequence of college degrees losing their distinctiveness. Historically a bachelor’s degree was a measure of extraordinary or at least above average career potential. That view may be undergoing revision. For example, the mean annual pay of females with bachelor degrees was 79.4 percent higher than their high school graduate counterparts in 2000, but that differential actually declined, albeit modestly, to 76.7 percent, by 2008. At the same time the cost of college education was rising in real terms and as a percent of family incomes, the financial advantages for women associated with a degree were stagnant, implying a falling rate of return on investing in a bachelor’s degree.

We are engaging in massive credential inflation. Whereas in 1940 it was perfectly respectable for persons with less than a high school education to deliver the mail and unknown for college graduates to do the same, by 2010 almost all mail carriers had a least a high school education and probably close to one in five has a four year degree (we are awaiting the 2010 Census data for the exact figure). Moreover, as more go to college, standards inevitably suffer, as the results of the National Literacy Survey conducted roughly decennially indicate.

We are spending ever larger amounts of money as a nation trying to demonstrate that we are good, bright, disciplined, and hard working -- qualities traditionally associated with college graduation. The costs are becoming so large that entrepreneurs and others may look for alternative ways of certifying competence and skills. Some possibilities include:

· Making more use of non-college testing of skills, perhaps including standardized exams akin to those used to confer the Certified Public Accountant designation;

· More use of formal short training programs run by private firms or employers that certify competence in specific areas of expertise -- trade schools if you will;

· The use of a national examination similar to a governmental civil service examination to measure general intellectual abilities and knowledge;

· Increased use of college-level courses for able high school students, perhaps eliminating the senior year in high school completely for the most qualified, trying to make the college degree cheaper;

· The reduction in the bachelor’s degree to three years similar to European countries (although Europeans probably have better pre-college training than Americans).

These ideas all have their problems. For example, the use of employer testing, which I find a highly efficient of screening workers for competence, potentially dramatically lowering the cost to society of skill certification, was severely circumscribed by the Griggs v. Duke Power (1971) Supreme Court decision and subsequent legislation. Perhaps it is time to revisit legislation in that area. Yet doing so would reopen old wounds relating to civil rights, governmental intrusion into hiring decisions, etc.

But let’s face it. Our population is aging, and given our highly inefficient third party payment method of financing health care, those costs are soaring, crowding out public spending on higher education. Our nation is deeply in debt, with investors openly wondering if the sovereign debt of the U.S. government may ultimately be downgraded as to credit quality. The costs of certifying competency of young Americans are rising too fast for too many people for too long of a time period. In this type of environment, innovations designed to lower college costs or define alternative ways of certifying skills are increasingly needed and economically nearly an imperative.

The above is a repost from the Innovations blog at the Chronicle of Higher Education.