Although the best-paid college grads are doing well, wages of college grads have fallen on average, after adjusting for inflation, in the past five years. The only group that enjoyed rising wages between 2000 (just before the onset of the last recession) and 2005 (the most-recent data available) were the small slice with graduate degrees.
…Explanations come in three strains, all of which have some merit. One, it’s more socially acceptable than it was a generation ago for the top-tier chief executive, hedge-fund manager or baseball players to make an enormous amount of money. Two, the world has changed in ways that make the No. 1 or No. 2 — whether a trial lawyer or a rock star — much more valuable than No. 19 and 20. As technology has helped create superstars, the gap between Oprah’s paycheck and those of local talk-show hosts is larger than ever.
And, three, there’s the influence on supply and demand of globalization and technology.
The point is that what used to be a college-degree premium is turning into a graduate-degree premium.A couple of issues here. Are we talking about cohort effects, or changes within a cohort?
Changes within a cohort would mean that college graduates of the class of 1980 were earning a higher wage in 1990 relative to their advanced-degreed peers than they are today. Cohort effects would mean that college graduates of 2000 are earning a smaller wage premium than college graduates of 1980.
If we are talking about a within-cohort effect, then we are saying that college degrees earned years ago are depreciating faster (or appreciating less) than advanced degrees. I find this a bit surprising, since technological change would tend to threaten at least some advanced degrees with obsolescence.
Of course, many people with advanced degrees are employed as professors, where having tenure means you can never be declared obsolete. I wonder if the graduate wage premium is simply an increase in rent capture on the basis of credentials in the fields of health and education. If so, then we are talking about very distorted markets, with lots of government involvement.
On the other hand, suppose that what is going on represents a cohort effect, with recent college graduates not earning the premium that their predecessors enjoyed. In that case, I think that changes within the education system itself may explain part of the problem.
My guess is that a lot of people who attend college today are not really ready for college. They get some remediation in college, but they also get “junk degrees” in subjects where standards are low.
If my hypothesis is correct, then folks who majored in real subjects, like engineering or philosophy or even economics, are holding up ok. That is, a philosophy major today is in the same spot in the income distribution as her counterpart 25 years ago.
However, the “average” college graduate is in a lower spot in the income distribution than her counterpart of 25 years ago, because the “average” now includes more people who majored in ethnic studies, or “communications,” or something else that does not require much in the way of critical thinking.
READER COMMENTS
Brad Hutchings
Oct 20 2006 at 4:02pm
I’d like to see this broken down by small and big firms, and also by sector of the economy. Perhaps this can be explained by increased proportion of jobs offered by smaller firms. Or perhaps by the rise of the service sector. Lots of degreed people working in Sprint PCS store ;-).
Chris
Oct 20 2006 at 4:23pm
It also could be the break down of the signalling effect of college. It used to be that only smart, hard-working people went to college and employers knew that they were getting good employees.
Now that everyone is getting a degree that signalling breaks down and employers aren’t willing to pay such premium on the signal is they used to.
Bill
Oct 20 2006 at 4:58pm
My guess is that a lot of people who attend college today are not really ready for college. They get some remediation in college, but they also get “junk degrees” in subjects where standards are low.
So very true. Sometimes college is just daycare for young adults.
Ragerz
Oct 20 2006 at 5:18pm
I am wondering if Arnold Kling has ever taken an ethnic studies course. If he had, it would be clear to him that such a course, if it is well-designed, does indeed require critical thinking.
spencer
Oct 21 2006 at 8:35am
I suspect that you are reading way too much into what is largely a cyclical development that has been made worse this cycle be the absolute drop in info-tech employment — it is down almost 20% from the peak.
Omer K
Oct 21 2006 at 11:37am
Though I disagree with what you say. Even assuming you were correct. That doesnt mean what is taught has any marketable skills in the economy.
If you get an engineering degree.. youre needed. No one can build a building without that knowledge. If you get a degree in the “ethnic culture of premodern samoa” or “womans studies” or whatever.. your knowledge might be exquisite, but it is practically worthless in maintaining our current postindustrial culture and standard of living. And I believe the market should, rightly, value it lightly.
Lord
Oct 21 2006 at 11:42am
I wouldn’t call the drop in info-tech employment cyclical. It still isn’t improving, only not getting worse, and lack of new entries is still bringing it back into balance.
Christina
Oct 21 2006 at 7:37pm
First off, thank you! As a current undergraduate student in philosophy, it’s refreshing to finally see my field listed among the “real subjects” where it belongs!
You’re quite right in saying that most of them are not really ready for college – I’d say not even remotely ready. The degree for them is just about the money they stand to make with it, which means that junk majors, and in some cases junk schools, are the norm. Many students look for places where they can get drunk for four years and expect to make money at the end of it, and perhaps employers are starting to realize this.
In addition, this lack of committment to education on the part of the students also means that even in classes that are quite simple, cheating and plagiarism run rampant simply due to students’ laziness. When these students enter the workplace, they have no idea how to do legitimate work. This could also impact the change in the value of the degree, I imagine.
Ragerz
Oct 22 2006 at 11:26pm
Omar,
First of all, since you disagree with me, I already know you have not taken a well-designed ethnic studies course. Do you believe that having a course on that subject that involves critical thinking is impossible?
You write: “If you get an engineering degree.. youre needed. No one can build a building without that knowledge.”
I have a better explanation. Engineers don’t get paid more because they are needed. They get paid more due to supply and demand. Water is much more “needed” (as in necessary) than gold, but gold demands a higher price in the marketplace. It is not the case that the market prices things that are more “needed” at a higher price. Rather, it is a matter of supply and demand. If no one can build a building without engineering knowledge, no one can even survive without water. But water is very cheap and engineers are very expensive.
Say that 75% of all college students majored in engineering. This would not render engineering any less necessary for buildings. But it would cause the price of an engineer to fall.
Here is an example that you might be more sympathetic too. Think about tax lawyers. We cannot say that they do anything useful; all they do is redistribute wealth. They certainly don’t produce anything useful in the world, like engineers do. Yet their price is often much more than an engineer. Overall, the price of a tax lawyer is inflated by barriers to entry.
“And I believe the market should, rightly, value it lightly.” (emphasis added).
Ultimately, it is this statement I object to. Market prices are not set solely based how “needed” they are, but also based on the degree they are able to exclude competition. Also, it should be recognized that “need” does not translate into demand unless it is backed up by cash. A poor person who is likely to die of some curable disease in the third-world can be said to “need” treatment more than a rich person “needs” a Lexus. But the market will rush to provide the Lexus before the medical care.
(Of course, if supply were constant, greater need = greater demand IF and to the extent that need is backed up by cash.)
It is situations like this that should lead one to refrain from saying that markets do the “right” thing. Markets do what they do. The invisible hand is amoral. That markets assign a low price to something is not indicative of its importance.
Omer K
Oct 23 2006 at 1:41am
And in your next post, you’ll tell me how Ethnic studies students have the highest SAT and GRE scores in all the land…
link
Oct 23 2006 at 11:50am
In 1990, after getting a bachelors in econ, I looked at grad schools with my 15 grand to spend.
They were all too mathematical for what I realized was economics.(I started college in mech. engineering) The Berlin Wall had fallen.(Cold War over)
Instead I invested in the markets to learn. 100 times my money later plus riverfront, lakefront, and oceanfront properties in NE. You can have your out of date grad degree. I may have less eliteness in the workplace but the marketplace is where I’m the entrepreneur. $$$
Ragerz
Oct 23 2006 at 12:46pm
Omer Writes:
“And in your next post, you’ll tell me how Ethnic studies students have the highest SAT and GRE scores in all the land…”
Perhaps you should pay attention to the claim actually made. The claim is not that ethnic studies majors have higher SAT and GRE scores. It is that a well-designed ethnic studies course involves and teaches critical thinking.
Xellos
Oct 23 2006 at 3:09pm
Ragerz:
I suspect the difficulty lies in finding that “well-designed ethnic studies course” you’re so proud of.
One of my cousins has an anthropology degree. To graduate she was forced to take several “multiculturalism” classes. Apparently classes about Incans and Mayans don’t count.
So, sorry, but you’ve got a quite a bit of an obstacle to overcome in proving your point. Your experience may not match the typical experience, but that word “typical” is rather important…
KP
Oct 23 2006 at 4:44pm
It’s simply supply and demand. Far fewer people chose to go to college in the past decades than do now. Many jobs that used to be attainable with a high school diploma are now college degree only. Take this and add in the effect of subsidized college tuition programs, and suddenly the market is flooded with degreed people. The easier fields of study are going to be the ones that have or will have the most wage depriciation. The really interesting area in the next 5-10 years will be Health Care. The recently publicized shortage of health care professionals, specifically on the low end, nurses, etc. is going to be flooded with applicants. Every other female I meet on campus is a nursing student.
Aftin Crowe
Oct 23 2006 at 7:38pm
I believe the reason college graduates are not making as much money as they use to is because there are more of them. The supply of college graduates have went up, there for the demand is not as high. Where as graduate students are a little harder to find right now, but as time goes on more and more people will get there graduate degree and will not make in the future as much money as they are making right now.
Rohan
Oct 24 2006 at 11:12am
Well, correct me if I’m wrong, Ragerz, because I’m not seeing what you’re seeing. For the first part, I’d think that the demand for water and engineers was very high, because they are needed. The supply of engineers is low because of barriers to entry, and because there are just less people than there is water. The barriers to entry for an engineer somewhat match that of an ethnic studies major (a college degree), but there is less demand for ethnic studies people. In other words, regardless of supply and demand, they are still not needed.
With regards to importance, well, what you find important is obviously not reflected by the market, who represents the majority. In the absence of changes in supply, the market gives low prices to things does give low prices to things it finds unimportant. Supply just hides it sometimes. In those cases, there’s enough to go around that prices don’t have to be that high
Rohan
Oct 24 2006 at 11:16am
Sorry about the typo:
In the absence of changes in supply, the market does give low prices to things it finds unimportant.
Ragerz
Oct 24 2006 at 11:09pm
Rohan,
Thanks for your comments. First, I think we should distinguish between “want” and “need.” I think your definition of “need” includes that which is merely “wanted.” In that case, you are correct in saying that which is not “needed” are given low prices. If no-one wants or needs something very much, then the price will be low.
You write:
“[W]hat you find important is obviously not reflected by the market, who represents the majority.”
First of all, I never said anything about what I find important. Second, the market often does not represent a majority. If you asked people, do you think it is important to provide a person who lives in the third-world with a curable disease medical care, the majority would agree that it is important. But, the market will certainly rush to provide a rich person with a Lexus, before it will rush to provide a person lacking money with needed medical care. I think most people would agree that it is more important for someone to be cured of a disease than for another person to have a Lexus rather than say, a Toyota Corolla.
The point here is that the market does NOT reflect the normative priorities of the majority.
In a nutshell, here is what a am saying. That something is wanted or needed by somebody is necessary, but not sufficient for it to have a high price. And further, that sometimes markets value more important things much less than less important things. In terms of allocating resources, it is not unusual for the market to focus on the trivial and unnecesary, even when there are much more important needs to be met. The price of an engineer is not guaranteed to be high, no matter how “needed” what an engineer does is.
Ragerz
Oct 24 2006 at 11:15pm
One last point.
As Rohan points out, as a logical matter, it is incorrect to say that because something has a low price, it is not very important. Thus, that ethnic studies majors have low salaries when they graduate does not indicate that their output is unimportant.
Ultimately, I am hardly interested in the case of ethnic studies majors compared to the bigger and more important cases. In general, in many cases, markets do not value the most important things appropriately. That is, it provides trivial products while more important needs are left unmet.
Lance F.
Oct 25 2006 at 8:47pm
Although I have worked in a unique industry over the last five years (gaming), it has been my experience that even the most decorated undergrads starting out in entry level positions. In the past, an undergraduate degree in almost anything was the key to a high starting position and salary. Now the market is flooded and only those who can demonstrate specific skills are prized. For too long, students have believed that any undergraduate degree is as good as the next; now they are seeing evidence to the contrary. Too many substitutes (skilled, experienced workers) are now available.
Heather P
Oct 25 2006 at 9:10pm
Is is that the wages of college grads has fallen, or the fact that their are so many more college grads now that the average is pulled down? We all know that, for example, teachers salaries are not high in any sense of the word, but now compared to previous years more college grads have degrees and become teachers. Add that to an average it pulls this down. Not like years ago when the only people that went to college were ones focused on becoming lawyers or doctors because they were all who could afford to go to school.
Bethany
Oct 26 2006 at 5:42pm
I think that this is true because there is a pattern going on. Years ago You could make pretty good with just a high school diploma. Some of the big paying jobs were held by high school graduates. Then came the years where the top paying jobs where hled by college graduates. It is just in the pattern for a graudate grad to be one of the top paying people. THey worked very hard to get through grad school and it is just a little reward for them to get a higher income. Maybe in years later they rises will be given to those will docotrate degrees. The world is getting smarter and we need to stay with it.
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