The Creative Economy and College Grads

Felix Salmon was nice enough to pick up my recent post on the Creative Economy  (Note: Felix blogs for Reuters and I am doing video commentaries for the new Reuters Insider service, which makes us colleagues of a sort).  However, he does put in a plug for a college education:

The long-term trend is inescapable: the returns to education are large and growing, and if you’re not a college graduate and you don’t own your own company, it’s becoming increasingly difficult to maintain a middle-class lifestyle. 

He’s certainly right about the long-term trend, and I’m paying big bucks to put my children through college (hear that, kids? No slacking now).  

But we have to be alert to possible changes in the economics of college. Take a look at this chart, which compares the average earnings of a young college grad with average annual tuition, room and board charges at 4-year colleges.

In 2000,  the average young adult with only a bachelor’s degree earned about 4 times the annual cost of a 4-year college.  By 2008,  the average young college grad was earning less than 3 times the annual cost of college. Going to college is still a good idea–but the payback period is longer.

Here’s another way of seeing the same thing. This chart compares the real cost of 4-year and 2-year college (tuition and fees) with the average earnings of young college grads, young associate degree holders, and young high school grads. I’ve adjusted for inflation, and indexed these numbers to 1998 to make the trends clearer.

If you spend a bit of time with this rather complicated chart, you can see that young adult earnings in real terms have had a slight downward trend over this period  for high school, associate, and college grads (FYI, advanced degree holders seem to be doing better, but that’s a different post).

Meanwhile the real cost of higher education has been increasing. Once again, the conclusion is that the payback period is likely longer, though a full analysis would require looking at unemployment rates and the value of the option to get a higher degree.

I tend to view this divergence between rising real college costs and flat or falling real  earnings  for young college grads as insupportable over the medium term for an economy like the U.S.  Either real pay for college grads has to pick up (perhaps because of a surge of innovation), or the real cost of higher ed has to stop rising.

I am hoping that the next business cycle will bring more innovation and more high-paying opportunities for young college grads, and better times for high-education metro areas.  But there are no guarantees, and unfortunately, current economic policy does not seem to be doing much to help.

Comments

  1. This is a really good point on the return on investment. The real cost of higher ed has to stop rising because wages are tethered to the economy, and education (particularly 4 years, and for-profits) costs seem more tethered to the availability of easy credit.

  2. The Fifth Horseman says:

    Michael,

    You continue to miss one major point which has been brought up repeatedly : The quality of what constitutes ‘college grads’ is declining.

    Women are 60% of college grads, and mostly in the humanities and social sciences. I bet if you check what percentage of college grads are in engineering, business, etc., it declined as a percentage of the total.

    A more accurate chart would be to see if Bachelor Degrees in Engineering had declining salaries.

    Now, as far as cost of college, that is clearly a bubble, and will pop, because it is just as subsidized by cheap credit as housing was. Startups like 2Tor, etc. are offering college degrees that are fully accredited, for much less.

    • The same points you make are true for men — domestic engineering degrees are down all around. Non-technical university professors are paid on a lower scale than technical.

  3. winstongator says:

    Please go further back with your data. The tech bubble obviously contributed to the income of young recent college graduates during the 1998-2000 period – I was one of those graduates.

    5H – engineering salaries would show a drop from 2000-today but probably a strong uptrend from 1990-today.

    • Mike Mandel says:

      There’s no doubt that educated workers had big relative gains going back to the 1980s, and it may turn out that this past business cycle was just a pause….I certainly would hope so. But my motto these days is hope for the best, plan for the worst.

  4. spencer says:

    We have a tendency to focus engineering studies on the current, not future needs of the economy — aerospace in the 1960s, petroleum in the 1970s, electronics in the 1980s, computers in the 1990s. By the time the typical young person get their engineering degree — 5 plus years — and a couple of years of experience the needs of the economy have changed and we end up with a surplus of highly trained, but narrowly focused engineers.

    Check the data on how many engineers are still working as engineers 5 years after they get their degree. I bet you will be amazed about how quickly that initial advanatge for engineers fades away.

    • “highly trained, but narrowly focused engineers”

      Have you ever heard of “specialization” and “division of labor”? That may shine some light on the “narrowly focused” part. Generalists will go only so far. Same as in science and academia – the era of the “universal talent” philosopher has been over since 200 or so years (roughly since industrialization).

      “Check the data on how many engineers are still working as engineers 5 years after they get their degree.”

      Offshoring and credentialism? If you require “engineering” degrees for “technicians”, then some engineering graduates will work in technician capacity. Some engineers will save their butt by going into marketing, sales, finance, etc. wherever the money is and what is not (yet?) offshored.

    • “focus engineering studies on the current, not future needs of the economy”

      As numerous others have pointed out before me, “education” has morphed into “job training” especially in tech-relevant branches. All those years we are hearing complaints that “graduates are not ready for the marketplace” and “academia doesn’t teach the relevant skills”.

      Are you assigning academia and educational institutions the role of defining (or even predicting) industrial strategy 5 years out? And is their role to train the coding monkeys in whatever is going to be the fashionable programming language (or tools) when they graduate?

  5. I found this to be a credible analysis of why tuition keeps rising so much:

    http://www.educationnews.org/higher_education/53395.html

    The striking take-away for me is the case that undergraduates are essentially subsidizing graduate programs.

  6. mike shupp says:

    Some jobs seen to innately require college training — professors, engineeers, middle managers, etc. Many others are more likely to require at least the smarts to get a college degree — web page design, office managers, construction foremen, bloggers, etc.

    Up thru say 2000, the numbers of college graduates/students in the labor market were smaller than the numbers needed for those jobs. Since then, there’s been a big crunch in the numbers of middle managers and engineers needed in American industry, and the percentage of new workers with college degrees entering the job market has climbed to perhaps 30%. We’ve more college educated people than we need to fill jobs needing college education; there’s an overstock, so such people are less valuable and the payoff for their expensive education has shrunk.

    My suspicion is that as time goes on, a BSc in Business Data Systems from say Phoenix University will look as good to employers as say a BA in Classical History from say Iowa State. I.e., the number of college graduates will continue to climb and the payout for getting a collge degree will continue to shrink. I don’t see a way to change this, and given that we’d like to see educational levels rise for American citizens as a whole, I don’t know that we should try to change this, regardless of its sometimes dismal economic outcome for individual graduates.

    Other than that, Spencer has a good point. In the 1960’s and 1970’s, the rule of thumb was that 1/3 of beginning engineers left their first employer within two years, mostly for jobs outside of engineering.

    • “Some jobs seen to innately require college training”

      What happened to the concept of college EDUCATION? When I went to grad school (not US), I was not “trained” in whatever were considered the current tools but in foundational principles. We were also herded through philosophy and other non engineering stuff which I considered a waste of time right then. With hindsight I can see the value. Unfortunately that, and my exposure to different cultures, implies a degree of perspective, reflection, and independent thought that is not universally appreciated.

  7. I will echo comments above. I grew up in Silicon Valley before it was called that – and all of my neighbors’ homes were filled with electrical and aerospace engineers. All were laid off by their mid-30s, and 100% left engineering.

    Three dozen of my own engineering colleagues left the field before the age of 30.

    We have a horrendous retention problem in this country, not a supply problem.

    The US government’s policy is to offshore innovation and import engineers from abroad (since skill sets tend to only be good for about 5+ years before they too are out of date). We could invest in our work force but we absolutely do not.

    Without engineering and without home grown innovation, the future of the US economy is dead.

    Separately, the charts above look primarily at graduate salaries versus costs. As long as tuition increases run at twice the inflation level, on average, then salaries will fall further and further behind. Many colleges and universities remain massively inefficient (I know – I’ve taught at two of them) and are highly resistant to meaningful change and improved efficiencies – it is always easier to whine to legislators than embrace change. As long as the costs rise at 2x (or in my state, about 4x) the inflation rate, graduates will fall further and further behind.

    • EE and aerospace are still here but it’s no longer their heyday. The hallmark of their and other “legacy” industries are now annual layoffs, pay cuts, demotions (“recalibration”), and general “austerity”. Oh, and I forgot, replacement of the “valued employee” paradigm with “contractors” – brought on per project, with or without benefits, from a surplus labor pool of in part former industry employees.

      One thing I seem to be seeing increasingly over the past few years is people trying to engineer an exit into finance or MBA occupations as engineering is generally perceived a dead end career (or career dead end).

  8. 1) Don’t confuse the retail cost of college with its actual cost. My oldest child’s official cost of tuition is about 43K/year. She gets an 8K scholarship, and we’re taking student loans of about 4.5K. The actual upfront cost is 32.5K, as you can see. Real, as opposed to nominal, tuition is based on market forces. You want to go to your “reach school?” Be prepared to pay full price. Willing to go to a school that wants you as much as you want them (i.e., my daughter), you get a nice discount. Willing to please a school that wants you desperately? Deep discount. Or go to a public school. None of this has any necessary relationship to the school’s quality, by thge way.

    2) As an entrepreneur with a fair amount of friends, customers, acquaintances, etc. who are also entrepreneurs of one form or another, I can assure you that the fate of the business cycle is, economic prosperity, a balanced budget, et al is strictly in the hands of the government. Make it easy and cheap to do business, and there will be less than 5% unemployment within the year. The government is killing us.

    3) How do 1 & 2 tie together? Our kids have to go to college because it’s to risky to make it on their own. This government seems to regard small business as the enemy.

    • “None of this has any necessary relationship to the school’s quality”

      It’s the school’s brand name that gets your foot in the door in the lucrative employers. Quality somewhat correlates with that. “Who knows who” correlates even more. The latter is an seems to be an increasingly defining feature of our society/economy, beating any concept of merit.

  9. I have a few thoughts I’d like to share. I find quite compelling Elliot Jacques view that people are largely stratified by nature and this affects the time frame of their planning; ranging from “one day at a time” through to “visionaries”. Education is both a symptomatic and causal factor on top of this. Higher education requires higher thinking (regardless of whether it is in humanities or engineering). The higher the degree the higher the thinking and planning required (think of the long term self directed effort required to complete a PHD). On top of that education has benefits of providing systematic access to critical information. The ability to access this information makes the longer time frame thinkers more effective because they have better data to base their predictions on. That being said, not everyone who is given access to the information will be able to use it. Unless academic standards (both for entry and award) are enforced rigidly, a higher demand for education will tend to deliver a lower standard of graduate.
    These forces will operate at the same time as globalisation. The increased complexity of globalisation means that benefits will accrue most to those at the higher level of thinking and planning – internationalists. The main beneficiaries of globalisation will be the “domestic” operators in developing countries. Domestic operators in developed countries are likely to lose out as the competition for resources trumps their infrastructure advantages.
    For innovation globalisation should produce a natural lull. The benefits to be obtained from implementing “tried and true” in developing countries should outweight the benefits of higher risk innovation in developed countries. As the difference between countries declines (or if globalisation locks up) I think you would expect innovation to become more important.

    • I don’t buy it. I have seen a bunch of PhDs and I’m overall not too impressed – they seems to exhibit a spectrum similar to non PhDs, including brilliant and mediocre. That PhDs are significantly better material in terms of smarts and “predictive ability” seems particularly ludicrous. The defining feature of a PhD is having researched a particular subject matter area in some depth, and presented the findings to an examination commission (with or without oral examination).

      But one comment I can make on “The higher the degree the higher the thinking and planning required (think of the long term self directed effort required to complete a PHD)”, when questioning why PhDs are “preferred” or “required” for jobs that on closer examination don’t require PhD level schooling by any stretch of the imagination, I have been proffered from several sides rationales that can be summarized as “the PhD has a track record of completing a difficult project in the face of adversity”. I have *never* heard the “smarts” or “long term/big picture thinking” argument.

      At his point it is probably redundant to mention that I don’t have a PhD.

    • Between the two of you (cm and Rycoka), that was a fun read. My take on a great deal of education is that it validates the individual, of course for the potential employer who is too lazy or uninformed to establish a more meaningful criteria, for more importantly, for the individual personally. Conversely, I have encountered individuals of such great talent that it seems the only thing holding them back is not knowing for certain the measure of their own talent.

      Time frame of focus, and therefore of planning, may indeed be an indicator of potential, but I would not hang it so heavily on nature, as I think you will find it to be a function of maturity as well, if you look.

      Deep technical specialization is a little different, because potential and ingenuity do not count for much if one hasn’t gone down the path of nitty-gritty learning.

      • LAO,
        Quite right about maturity. Jacques posits that most people are capable of a step up in level every ten years or so. Gives us old people some hope when it comes to dealing with at least some of the whipper-snappers.

      • CompEng says:

        Our culture may have lost some of its respect for the voice of experience, but I suspect these things are cyclical, and we may be learning the price of the culture of youth.

      • I have to put all replies at this level as I don’t see a reply link at more nested levels.

        LAO: Aside from technical considerations, I have reason to believe one important aspect at least in “big company” hiring is avoiding the appearance of discrimination (not limited to protected category like “race”, gender, etc.) by lifting the “personal/demographic traits” category into the technical/professional domain. Especially in “tech” you often see laundry lists of skills, educational background, and specific experiences (often phrased as a “preference” or “plus” not a stringent requirement). I have sufficient (for me) evidence that any of those will be waived for the “right candidate” for whatever the employer/hiring manager considers “right”.

        Aside from that, you cannot reliably judge people’s sustained performance and fitting in by the standard interview process. In Germany it is common for people to be hired “on probation” (usually 3-6 months) with the provision that at the end of the probation period they can be dismissed without reason or converted to full employee at which point all protections kick in, which is an effective way of dealing with this risk.

        CompEng: By the time the learning happens, the seed corn may be consumed (or spoiled). The labor oversupply/productive job scarcity, exacerbated by the crisis but really persisting from the dotcom bust, impacts job market entrants particularly hard.

      • Reply to cm: I’ve always been stunned at the relative casualness of American manager colleagues toward filling the requisition, knowing that one will be stuck with the candidate for good, or until a case can be built for incompetence or job evaporation. I worked with Germans frequently and, besides the rationality toward new employees, was struck by the attitude toward vacation as a necessary revitalization, not something one earns by being with a particular employer for an extended period. It is ironic that the American system works against the workforce mobility that is often lauded.

      • LAO: As for perks with accrual or vesting where you have to “start over” when going somewhere else, they are if not outright intended, then at least used as “golden handcuffs”. As a friend of mine aptly pointed out, “it’s so that the company decides when you leave, not you”.

      • LAO: From a legal perspective, it is probably not *that* difficult to get rid of an individual in the US. Among the more powerful nonlegal hurdles against letting somebody go are probably general inertia (there is still “hassle” involved), or the manager getting politically weakened by having to admit a hiring mistake, or even the manager’s reluctance to face up to their subordinates. Also in some (?) jurisdictions the company gets dinged with higher unemployment insurance rates when letting people go without “cause”.

        As for why probationary hiring is not popular, perhaps there is a discrimination angle to it as well – “why did you keep that guy but not me”.

Trackbacks

  1. […] Michael Mandel sees the payback period for going to college growing longer: “In 2000, the average young adult with only a bachelor’s degree earned about 4 times the annual cost of a 4-year college. By 2008, the average young college grad was earning less than 3 times the annual cost of college.” […]

  2. […] by becoming much more expensive. Mike Mandel breaks down some numbers showing how the payback period of a university degree has become a lot longer in the past […]

  3. […] The Creative Economy and College Grads: Find out how the economy may be adapting for college grads. […]

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