The Future of the College Premium Debate

A few months back I picked up a copy of Divided: The Perils of Our Growing Inequality, edited by David Cay Johnston, who signed it when I hobnobbed with the (liberal) one percent a few months back. Its essays make for quick reads on planes, trains, and other forms of transit. One contribution by Jared Bernstein titled, “Inequality Across Generations,” struck me. At the end he advocates “‘college for all who are able’ … as an ambitious investment in building human capital assets for the disadvantaged.” (The essay was originally published in 2007.)

Curious, I looked on Bernstein’s blog and found a 2012 post in which he discusses whether college graduates in low-skill jobs still get a wage premium. The answer’s yes, but I’ll scrutinize why he says so in a moment.

But first, readers keeping score at home will recall that we’ve been sternly warned that regression analyses of higher education “premia” that control for occupations are invalid because “occupation is an outcome variable and not a pretreatment covariate.” And scorekeepers will also recall that I think that argument throws out standard economic theory on occupational wages. When your only tool is regression analysis, every omitted variable looks like a bad control.

(To defend Divided, one of its essays, “Why Do So Many Jobs Pay So Badly?” by Christopher Jencks, states, “The logic of a market economy is that we should all be paid the smallest amount that will ensure that our work gets done, and that is what low-wage workers generally receive.” (68))

I’m not alone, however. Bernstein wrote his blog post in response to findings by two researchers, Paul E. Harrington and Andrew M. Sum, who estimated that in 2012 half (!) of all college graduates under 25 were unemployed or employed in jobs that don’t really require much college education according to the Labor Department. Harrington and Sum should be better remembered for taking on Georgetown University’s Anthony Carnevale, who in 2010 estimated a shortage of college grads by 2018.

Please stop laughing. This is serious.

Harrington and Sum irresponsibly threw all caution into the wind and controlled for occupation in their analysis of college outcomes. They found, unsurprisingly, that college graduates in low-skill (“non-college”) jobs earn significantly less than college graduates in higher skill (“college”) jobs. The literature they cite calls this phenomenon “malemployment.” Harrington’s and Sum’s findings tend to show that occupations matter quite a bit for earnings, leading them to conclude, “If malemployment among college graduates simply does not exist, as the Georgetown forecasters [Carnevale] argue, then there should be little difference in the earnings among college graduates regardless of whether they were employed in college labor market occupations or not.” You can see their results charted in their response to Carnevale in all their brutality.

 

H&S Malemployment

(Yes, you read that right: Although it’s obviously a typo, advanced-degree holders in New England in 2009 earned just 6.6 percent more than high-school graduates if they were in non-college jobs. The next question is how well advanced-degree holders did if they found college occupations—rather than non-college occupations—that didn’t require any advanced training.)

To clarify, it doesn’t matter for Harrington and Sum if you think college mainly signals preexisting abilities or creates Very Important Human Capital. Their point is that there just aren’t enough college jobs to go around.

Bernstein, as well as David Neumark, another college-for-all academic, disagrees with Harrington’s and Sum’s methodology. Both argue that researchers should measure the college wage premium within occupations, and when they do so it’s huge. I’ll stick to Bernstein, since he kicked off today’s adventure:

Bernstein Premium

(Ironic that for all the drinking that supposedly goes on in college the intra-occupational premium for bartenders is scant. Guess they’d learn more about serving drinks in class?)

You might be tempted to ask how, exactly, college makes people 50 percent better at childcare, for example. I think I’m good with children, but it’s not because in my Plato seminar I read the Timaeus, where Socrates recommends educating children the rulers deem worthy and dumping the inferior ones onto the ranks of the proles. (This is also the dialogue where Plato talks about the (metaphorical!) island of Atlantis, which, sadly, is probably the thing he’s best known for.) Neumark, Bernstein, and those who agree with them are invited to satisfy your temptations. For my money, there’s almost no human capital effect on low-skill occupations.

I think it might be useful to go through the occupations Bernstein lists and show their wage dispersions. It turns out that even for the best case scenarios, Bernstein’s big premiums don’t account for a lot in annual earnings.

Occupation Intra-Occupational Premium 10th Percentile Annual Earnings 50th Percentile Annual Earnings 90th Percentile Annual Earnings
Retail Salespersons 49% $16,830 $21,140 $38,820
First-Line Supervisor of Retail Salespeople 42% $23,490 $32,700 $62,830
Waiters/Waitresses 20% $16,300 $18,590 $29,810
Customer Service Reps 45% $19,640 $30,870 $50,570
Cashiers 34% $16,420 $18,960 $27,710
Receptionists and Information Clerks 31% $18,330 $26,410 $38,170
Office Clerks 20% $18,040 $28,050 $45,340
Childcare Workers 49% $16,430 $19,600 $29,770
Home Health Aides 26% $16,690 $21,020 $29,480
Bartenders 9% $16,400 $18,920 $32,780
High School Grad, FT (25+) N/A $15,000-$17,499 $35,636 $70,000-$72,499
Bachelor’s-Degree Holder, FT (25+) N/A $25,000-27,499 $56,929 $100,000+

(Source Bureau of Labor Statistics Occupational Employment Statistics (OES) (2013), Census Bureau Personal Income tables. There’s some apples-to-oranging going on here as Bernstein’s premiums are for 18-30-year-olds and the OES wage ranges are for all ages. I’m also unclear on what Bernstein means by “less than college” in his table, which might include college dropouts or just be high-school graduates who never go to college.)

My point is even if a college education vaults someone into the upper earnings percentiles of a given non-college occupation, there’s little hope that he or she will earn as much as the median full-time college graduate. In many cases such individuals won’t even earn as much as the median high-school graduate. Some premium!

Although Bernstein wrote his post two years ago, the intra-occupational premium is really the endpoint of the debate on the college premium—once you’re willing to recklessly contaminate your regression results with bad controls based on the standard theory heresy that people will be paid “the smallest amount that will ensure that the work gets done” irrespective of educational attainment or student debts.

Except I can’t imagine someone at The New York Times deploying results like Bernstein’s with a straight face. Being in the 90th percentile of waiters/waitresses still means being a waiter/waitress. No, the media will just stick to the misunderstood Average College Graduate, who’s bound to be named Time‘s Person of the Year at some point.

In the meantime I hope we’ll see more work like Harrington’s and Sum’s, which I recommend reading.

4 comments

  1. “You might be tempted to ask how, exactly, college makes people 50 percent better at childcare, for example.”

    Do you think having a degree is a signal to employers? E.g. this person can complete tasks, is articulate, responsible, etc. I doubt college gives anyone these skills, but it is a place to demonstrate them.

    Still, as you say, the person is still in childcare and not making much compared to people using their degrees.

    1. ” I doubt college gives anyone these skills, but it is a place to demonstrate them.”

      To varying degrees, I believe college does. The two issues I see with the human capital equation is a) whether the job actually requires those skills, and b) whether those skills can be quickly developed on the job by a non-degree holder. If people are spending 4 years and $X on college for skills that can be developed much cheaper and quicker on the job, then we have a huge mis-allocation of resources. Or as Matt eloquently put it in one of his articles, wealth transfer to the higher ed institutions.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s