Monthly Archives: October 2014

Driving Forces of the College Bubble

Since the last bubble pop in the housing market, the most discussed bubble has been the college bubble. Not only do economists not agree on whether there is a bubble, but they also don’t agree on what is driving the bubble? [1] Tuition rates and the number of graduating students has quadrupled in the past 30 years, far outpacing inflation and job growth. [2] Yet the opportunity cost of not going to college has never seemed higher. [3] After lost wages and cost of tuition is considered, the difference in earning potential has been calculated to be as high as half a million dollars. This differential is based on the pay gap between college graduates earning 80k and highschool graduates earning 43k. [3] For the most recent graduates, this number does not tell the whole story. In fact, for them the choice is not nearly as simple as the NY Times article “Is College Worth It?” suggests. This paper will address three major flaws with the much touted wage gap calculation and what it says about the underlying supply and demand for degrees.

First, all bubbles confer huge benefits to early entrants, while later entrants are faced with huge risks from entering the over-valued market. Nevertheless, as the bubble peaks, two stories are prevalent; one declaring a bubble exists and another warning of lost rewards for those who don’t buy in. This is the logic mirrored in the pay gap. College degree holders from the 1960s to 1980s were an elite group of around 10% of the population. [2] They came to hold the top positions at US companies, as the stories of mailroom to C-suite success declined. Today with 33% of the population holding a college degree, a degree alone no longer means a management position and elevated salary. These positions now call for a master’s degree. While the high salaries of the early entrants widen the pay gap, new entrants are greeted with a much different market [4]. How different is this market?

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