An Education Bubble?

Recently my mind has been reoriented from macroeconomic to microeconomic concerns, specifically education.

First, I wanted to share this C-Span taping of an event on racial disparities in education and employment that happened at the Urban Institute. The discussion was built around research that I conducted with Marla McDaniel using the 1997 National Longitudinal Survey of Youth. I ask a question on new hire tax credits at 1:04:15. A lot of this was about the employment patterns of young whites and blacks, which was the focus of our research, but career and technical education, as well as apprenticeships also came up.

I'm also gearing up to work on this NBER chapter on the engineering workforce, which has reoriented me towards a lot of these questions about the extent to which our higher education system is able to supply the labor market with the workers it needs. I have a few articles to share on this. Yesterday, I read this AP article which was reprinted in the Washington Post on the shift away from four year degrees and towards more technical degrees. Glenn Reynolds explicitly compares the "education bubble" to the housing bubble and suggests it's going to burst. I'm not sure I entirely agree with the idea that we have an education bubble. The college wage premium is still very wide, so decisions to go to four year institutions seem to be responding to real earning prospects. I don't know whether tuition is keeping page with the college wage premium - perhaps higher education is somewhat overvalued, but the point is education does pay. It's hard to explain that away as a bubble unless you're going to claim that the demand and supply side of the labor market both simultaneously over-valued education and did so steadily over the course of several decades. This isn't to say that everyone earning a degree needs to earn one. College is a status simple and it is personally fulfilling, so there are certainly people in college who don't need to be there from the perspective of the labor market. But that's very different from saying that there's a bubble.

Joel Trachtenberg - former president of my graduate alma mater (George Washington University), and namesake of the public policy school where I earned my degree, argues that one solution may be a three year degree. The president of the American Association of Colleges and Universities disagrees.

I think that more options is always going to be better, which predisposes me towards supporting a three year degree that may more appropriately fulfill some students' needs. But I think the bigger problem is not at the high end of the education scale, but at the low end. Our problem isn't a higher education bubble, it's a bi-modal education distribution. We have far too many people who drop out of high school or who have a terminal high school diploma, and far too few people with mid-level skills: associates degrees, technical schools, certifications, apprenticeships, etc. That comes from a failing secondary school system and a world famous higher education system that emphasizes four year degrees, with far fewer institutions providing mid-level skills.

Thinking about how educated our workforce needs to be is always a little odd for me too. Because I'm interested in long-term investments and the problems that the market faces in providing these long-term investments, I'm also always thinking not just about what kind of education we need for the current labor market, but what kind of education we would need for the ideal labor market. In my view, the market economy introduces discount rates that are far too high. Basic research is too risky, so it is underinvested in. The market militates against the big investments that would be optimal were we not constrained by what Keynes called "the dark forces of time and ignorance": colonizing Mars, mining the asteroids, engineering life, guiding evolution, Dyson spheres, seasteading, terraforming other worlds - you name it. These things are hard for the market to invest in, and so we bump along sub-optimally as we always have. If I were to consider optimal levels of investment in both physical and human capital, I would guess that we are considerably under-investing in higher education. But you have to strike a balance between the world we live in and the world that we could or should live in. So my official line is that we need to graduate more high school students and more of them need to continue on to mid-level technical training, while we maintain the high quality of higher education. But ideally - if I thought society would be willing to make more investments and take more chances on the future - I'd go even farther than that.