And Will Peter Orszag Pay for Your Credential Inflation?

Peter Orszag, “Why are so many college graduates driving taxis?Bloomberg[, a publication I don’t regularly read, so you’re getting the Japan Times syndicated version.]

B.H. Obama’s former budgeteer writes:

[D]emand for cognitive skills associated with higher education, after rising sharply until 2000, has since been in decline … This reversal in demand has caused high-skilled workers to accept lower-level jobs, pushing lower-skilled people even further down the occupational ladder or out of work altogether.

The employment rate in “cognitive” occupations — managerial, professional and technical jobs — increased markedly from 1980 to 2000, their research found, but it has since stagnated, even as the supply of skilled workers has continued to grow.

What has changed?

Just to note, a glut in college-educated workers can’t create unemployment for non-college-educated workers (or anyone else) because of the lump of labor fallacy. The real problem—and I don’t see a lot of economists admitting this—is that the U.S. never really recovered from the Dotcom bust.

Civilian Employment-Population Ratio – 25 to 54 Years

Notice that the peak is at 2000. Given that most of the growth after that was construction of houses on overpriced desert real estate, there isn’t much of a reason to see increased demand in cognitive skills.

[A]n excess of skilled workers has led them into the “routine” job market — such as sales and clerical jobs — reducing wages there and pushing less skilled workers into “manual” jobs in construction, farming and so on.

What’s puzzling here is that it seems inconsistent with evidence that the wage premium enjoyed by college graduates has persisted … the earnings premium for college graduates has risen substantially over the past several decades and that investment in college “appears to pay off for both the average and marginal student.”

The “weight” of the wage premium diminishes as the proportion of higher-educated people in the population increases. Also, to say that college appears to pay off for the marginal student is self-evidently false if you’re also saying that they’re driving taxis. Third, there are plenty of unemployed college grads out there.

The still-strong earnings premium strongly suggests that the demand for skill has not collapsed. After all, if cognitive skills became less valuable in the labor market, wouldn’t one expect wages to fall more for college graduates than for others?

Maybe it’s demand for signaling value in human capital-intensive industries, not skills. There are a lot of people whose high incomes are due to rich people’s willingness to pay them lots of money because they went to elite universities. Plenty of CEOs and finance types are paid quite a bit to produce very little.

The cold comfort I can offer is this: Going to college may still be worthwhile — if not to be sure of qualifying for skilled jobs, then at least to avoid the even worse prospects of those who don’t get a degree.

Orszag’s closer is what makes his editorial repugnant, which is pretty impressive because he was doing better than most until then. High school students would be well-advised to not go to college (and take out student loans) just to qualify for jobs they can already do. They probably won’t enjoy the experience, and those who are unprepared will likely flunk out at a total loss. Maybe Orszag, a chairman at bailed-out Citibank and Distinguished Scholar at NYU’s law school, could do something that would help the poor, like advocating full employment instead of wealth transfers to universities.


Jaison R. Abel and Richard Deitz, “Just Released: Are Recent College Graduates Finding Good Jobs?” Federal Reserve Bank of New York.

The authors gave a press briefing that is unavailable here, but they have a few quotes.

In our presentation, we show that both unemployment and underemployment for young graduates are in fact higher now compared to, say, a decade ago. At the same time, however, we show that it is not unusual for newly minted college graduates to take some time to transition into the labor market and find jobs that utilize their education. In other words, young graduates typically have relatively high unemployment and underemployment rates as they start their careers, but those rates drop pretty rapidly by the time they hit their late twenties.

This does not fill me with warm fuzzies about the college premium argument.

[T]hose with degrees in majors that provide technical training, such as “Engineering” and “Math & Computers,” or in those that are geared toward growing parts of the economy, such as “Education” and “Health,” have tended to do pretty well when compared to the rest of the pack. At the other end of the spectrum, those with a “Liberal Arts” or “Leisure & Hospitality” major tend to have lower wages, higher unemployment, and higher underemployment.

Ouch. It gets worse when you think about how regressively universities charge based on majors. Engineering and math require some significant equipment for classes, but liberal arts just require classrooms and instructors. Although there’s plenty of program bloat going on, one problem with liberal arts is that they subsidize the programs that lead to jobs, making campaigns to charge liberal arts majors more for tuition akin to a sin tax. The more you tax it, the less it occurs, and the less revenue you get. If students were charged the marginal cost of supplying their majors (and it also wasn’t spent on coaches), then liberal arts would cost less and mightn’t be so derided.



  1. Great entry, Matt. Maybe this ass-hat should read economics professor Richard Vedder’s October 20, 2010 piece “Why Did 17 Million Students Go to College?”

    There are so many factors in play, i.e. automation, outsourcing of white collar jobs, and the fact that MANY Boomers plan to keep their positions until they hit 75. My wife’s father has an MA in liberal arts from Kansas State. He became a land appraiser right out of college. Now the same applicant – with the exact same credentials – would be drowning in student debt, and they would be LUCKY to land a bank teller job making $11 per hour.

  2. Behold what everyone wants yet so few may have…..

    “Maybe it’s demand for signaling value in human capital-intensive industries, not skills. There are a lot of people whose high incomes are due to rich people’s willingness to pay them lots of money because they went to elite universities. Plenty of CEOs and finance types are paid quite a bit to produce very little.”

    I give this group credit, they have done a good job getting everyone to aspire to their lifestyle. The problem is that it is not duplicatable into the “public”. They’d like to impose their unsustainable standard of living on the remainder of the tax-paying population, and will succeed by attracting the best talent and the most well connected.

    The Best Business opportunities in America follow this key method: Socialize the Losses, Privatize the benefits.

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