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California Association of Private Postsecondary Schools

The College-Graduate Glut: Evidence From Labor Markets


The Chronicle of Higher Education - July 11, 2012 - by Richard Vedder

The price system works marvelously to allocate resources in our society, but in higher education, prices often do not reflect the true value society places on resource usage, as they are often distorted by a variety of policies. The price of elite colleges, for example, is actually well below what demand-and-supply conditions would warrant, while the price of college in general has been distorted upward by extravagant federal student financial-assistance programs (although some would argue with that contention).

But labor markets are largely free of these distortions, and very recent evidence from them on the whole supports the hypothesis that the huge gains from obtaining a bachelor’s degree may be diminishing for a simple reason: Supply has been rising faster than demand for college graduates.

The large differential between the earnings of high-school and college graduates is often cited as proof that college has a high payoff. Elsewhere I have argued that this is not an entirely useful comparison, since the behavioral traits of high-school graduates are markedly different than those who complete college. Moreover, those differentials have actually narrowed some in recent years. Compare 2008 and 2010, looking at the average earnings of those working full-time, year-round. For males with a high-school education, earnings rose 1.87 percent, while for those with bachelor’s degrees, they fell 4.17 percent (for those with master’s degrees, earnings were essentially unchanged). Those with a less than 9th-grade education fared better in terms of earnings change than those with degrees, whether associate, bachelor’s, or master’s. In inflation-adjusted terms, the earnings of those with bachelor’s degrees on average fell well over five percent (and over $3,500 in absolute dollars) at a time when college costs were rising at least as much.

The results hold if one uses median instead of mean income, or looks at all workers, not just full-time year-round ones (although the earning differences are less stark). The data are more mixed regarding female workers. Longer term, though, from 1991 to 2010, earnings for all female workers rose more on average than for just those with bachelor’s degrees.

As more and more college graduates take jobs as janitors, bartenders, truck drivers, etc., I suspect we will see the earnings differentials narrow more, at the same time that college costs continue to rise at rates greater than inflation. However, people respond to market conditions. If the gains from a college degree fall relative to its costs, people will start seeking substitutes, be it in the form of cheaper degrees or in the form of non-degree credentialing.

Caveats are in order. We are looking merely at a two-year period, a period of economic under-performance as a nation. The data are based on a good sample (the Current Population Survey), but one subject to some sampling error. The numbers for females do not show the same deterioration in relative advantage for college graduates. Later this summer, the 2011 data should be released, giving us a little longer time horizon to see if a new trend is really developing.

Partly by design, colleges develop cultures that are relatively isolated from the real world. Highly subsidized, the university community is loathed to change, contemptuous of the discipline of markets (a point explicitly made by some faculty critics in the brouhaha at the University of Virginia over the status of President Theresa Sullivan). College professors hold views on a wide variety of issues fairly widely at variance with those of the American population, for example. Concern about labor-market outcomes of students is decried by some as “mindless vocationalism” or “corporatist thinking.”

This sort of political myopia may have serious adverse consequences on the academy in the long run. You cannot thumb your noses at economic realities or popular opinion forever without have people ask “Why are we subsiding this activity?” If the 2011 data continue the trends with respect to earnings of the previous couple of years, I suspect more and more Americans will simply say “no” to higher education. What happens at some schools if, say, the Class of 2017 simply does not show up in expected numbers for school a year from now?