Hundred Pockets

As usual, the debate at Felix Salmon’s blog has thrown up some interesting comments. Marc takes issue with the idea that university students can be better off incurring debt now, in exchange for higher wages later:

@ Pockets
The argument you make for student loans (you start with more debt, but you’ll come out ahead because you’re going to earn more) is perfectly true on an individual level with everything else staying the same. In aggregate though, it doesn’t work. If half the people go to university an get a degree there is no chance that they will earn collectively substantially more than they would have if only few people got a degree. It’s a law of supply & demand. If more people with a degree are available, the difference the degree makes in the salary they can command is going to be much less significant than if only 10% of the people graduate.

Marc is of course entirely right that increasing the supply of something (like graduates) should reduce its price. But in the 1980s and 1990s, something kind of amazing happened in both the US and the UK…

First, the supply of graduates definitely did increase massively during the 80s and 90s. Here’s a chart showing British higher education participation since 1970:

The proportion of kids attending university more than doubled. So we know what should have happened to graduate wages, compared to non-graduates, right? Increased supply means a lower price, so the graduate wage premium should fall. But here’s what actually happened:

Yup, the wages of graduates went up compared with those of non-graduates. So we had both higher supply and a higher price. Which breaks all laws of supply and demand, surely…?

Actually, no. It just means that the demand for graduates wasn’t constant. Instead, demand must have gone up even faster than the increasing supply. That is, even though universities were churning out graduates, companies wanted to snap them up faster than they could earn their degrees.

Why? Probably something to do with the I.T. revolution. Computers have massively increased the productivity of highly educated workers, but have done basically nothing for the productivity of shelf-stackers and street sweepers. So even as the supply of graduates ramped up hugely in the 80s and 90s, their wages were being bid ever higher by employers. Increased supply and increased price, all at once.

The story I just told may sound simple – economists call it ’skills-biased technological change’ – but it’s one of the major achievements of modern labour economics. It’s the basis of Claudia Goldin and Lawrence Katz’s book  The Race Between Education and Technology. Their story is that for the first 80 years of the 20th Century, the supply of educated workers outstripped demand (education was ‘winning’ the race). But since 1980, technology has ‘overtaken’ education – meaning the growth in student numbers hasn’t been anything like fast enough to bid down graduate wages, which are being pushed ever higher by technological innovations which favour skilled/educated workers.

In fact, despite the explosion in higher education in recent years, the graduate wage premium has never gone back down to its pre-1980 level. It’s stopped racing upwards so fast, but it isn’t falling.

Of course, this really sucks for non-graduates – their wages were lower than graduates’ to start with, and have fallen ever further behind. It’s one of the leading explanations for growing income inequality in the US and UK over the past few decades.

But that’s all the more reason to help as many young people as possible into university/college. For now at least, our economies can’t get enough of them…

This entry was posted on Thursday, September 3rd, 2009 at 10:19 pm and is filed under economics, education. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.