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?  Tuition rates and the number of graduating students has quadrupled in the past 30 years, far outpacing inflation and job growth.  Yet the opportunity cost of not going to college has never seemed higher.  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.  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.  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 . How different is this market?
This market is characterized by 41.6 million college graduates and only 28.6 million jobs that require a college degree . Stated another way, only 27% of jobs currently require an associates degree or higher but in the United States 47% of the work force has these qualifications.  The constant headlines about degree-holding baristas are driven by the fact that 48% of college graduates are working in jobs not requiring a college degree and 37% are working in jobs that only require a GED.  These graduates struggling to find a college-level job are primarily newer entrants who are finding that college alone is not a ticket to success in today’s market.  In this market, degrees are over supplied and over valued.
Second, the growth in degrees awarded each year is quickly outstripping the growth in demand. Over the past 10 years, from 2001 to 2011, the number of college degrees awarded increased 39% for bachelor degrees and 71% for associates degrees.  Over the same time period, the number of jobs requiring a bachelor’s degree or higher did not increase and the number of jobs requiring an associates degree or higher increased by only 5%.  Though more people are awarded degrees than ever before, the demand for college degree holders has not increased substantially. This is reflected in a 60 total increase over the past two decades of degree holders who are under employed.  As supply exceeds demand, wages should fall as well. Indeed, real wages for young graduates fell 5.4% between 2000 and 2011.  These metrics indicate that the worth of a college degree has been falling for the past decade even as record numbers of students graduate college – a clear sign of a bubble. Nevertheless, the wage disparity between college graduates and high school graduates continued to increase over the same time period. 
This brings us to our third point. The increasing wage gap is primarily a reflection of under-employed college graduates displacing high school level employees. Never before has the employment outlook for a high school graduate looked so bleak. The number of young (25-32 yro) high school graduates in poverty has tripled since 1979 from 7% to 22%.  Wages for the same group have declined by 11% in the past decade.  Likewise, the unemployment of this age group has nearly doubled between 2007 and 2013 from 6.3% to 10.6%.  In essence, the wage gap is not comparing career success so much as basic employability. Needless to say, the comparison between an employed college graduate at minimum wage and an unemployed high school graduate results in quite a stark wage gap. It seems that over the past decade demand for under employed college graduates has replaced demand for high school graduates.
This makes sense. An employer looking at two resumes for a minimum wage job would choose the one with a degree – all other things being equal. Likewise, an employer looking at resumes for a college level job will choose the one with a master’s degree over one with a bachelor’s degree. Indeed, masters degree and higher is the only segment of the population that has seen increased wages and more job openings. Jobs requiring these qualifications doubled in the past decade.  Essentially the masters degree has become the new bachelors. What we now have is an employer’s market where over-qualification is the norm.
Given these market dynamics, speculation abounds over when and how the college bubble will pop. It is unlikely that it ever will. Economically, rational students should make decisions at the margin. Therefore, so long as the growing price of college does not over-run the benefits obtained by the growing wage gap, students will continue to go to college more. However, one thing should be clear. College enrollment is no longer a choice between flipping burgers and a successful career; rather it may be a choice between flipping burgers and no job at all! Even more to the point, the wage gap is not an indicator of success.
From a policy stand point, the current administration continues to boast that a college degree is the ticket to success. In fact, efforts are being made to increase the percentage of degree holders in the population from 30% to 60% over the next 15 years.  The reasons vary from making us more competitive as a nation by bringing us in line with other OECD countries to returning the United States to its former intellectual and industrial dominance.  If the goal of increased college enrollment is for the benefit of society, then perhaps we don’t have a bubble. However, if the goal is simply to get any job and escape unemployment, then we are hugely over-invested in education.
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