Why Aren't More People Going to College?

Altonji, Bharadwaj, and Lange do not know.

They say:

The anemic response of skill investment to skill premium growth | vox - Research-based policy analysis and commentary from leading economists: The earnings premium for skilled labour has increased dramatically in recent decades. Yet... Americans are not acquiring significantly greater skills in response to this change.... Since 1980, the demand for skilled labour has risen faster than the supply of skills, fuelling a steady increase in the earnings premia found for measures of skills such as schooling or cognitive test scores. The rapid rise in the skill premium represents a substantial increase in the economic incentive to acquire skills.... [B]etween 1980 and 2000 the internal rate of return for completing high school rather than dropping out after tenth grade has increased from approximately 40% to 55%.... How rapidly and how much young adults respond to this increase in the returns to skills and how this response varies across the population have important implications....

In Altonji, Bharadwaj, and Lange (2008), we... look at factors that influence skill acquisition, such as parental education and growing up in a two-parent family... make use of measures of the ease with which young adults transition from schooling into the labour market.... [O]verall the 1997 youth cohort is more skilled than the 1979 cohort... at the median... skill[s]... increased by about 6.5 percent. Is [that]... a behavioural response by youth to the widening skill premium?... [N]o.... [M]embers of the more recent cohort have significantly more educated parents than young people in 1979.... Holding parental education, race and gender, and family structure constant, the supply response to the increase in skill premia between cohorts was small: about 1% on average and about 1.5% at the median.... It seems that very large increases in skill premia are necessary to induce young workers to increase their investments in skills substantially.... This implies that, all else equal, the large degree of earnings inequality observed today is likely to persist far into the 21st century....

[T]he difference in the skills of the 1980 and 2004 youth cohorts is larger at the top of the skill distribution than at the bottom... due to the changing distribution of parental education.... [T]he changing distribution of skills in the population will exacerbate rather than counteract the trend towards increasing earnings disparities....

At this point we can only speculate as to why the response in skills to the increase in skill premia is so small... non-pecuniary costs of skill investments... liquidity constrained... myopic... other reasons... consistent with a number of studies (e.g. Kane (1994), Dynarski (2003)) that find that schooling decisions are quite sensitive to direct costs of schooling and tuition subsidies.... Cunha and Heckman (2007)... [perhaps] parental investment during early childhood shapes the potential to acquire additional skills later in life....

At this point, the question of why the supply response to the increase in the labour market returns to skill has been so small is an open one. In our opinion, it ranks among the most important empirical issues facing labour economists today.

This raises the possibility that the only easy way to reduce market inequality is to greatly increase the supply of the skilled and educated in the long run by making higher education free--which is a very dubious policy on the inequality front, because it starts with a honking huge transfer from the average taxpayer today to the relatively rich well-educated of tomorrow.

Comments

[DCBob]

Does anyone know how skill investment in the developed countries varies with the extent of public skill investment?

[jsalvati]

Perhaps young people (an I am one of them) just aren't aware of how huge the wage premium is. It's not like students spend a lot of time pouring over data like this. Perhaps we need to do a better job of telling students what the returns are to different skills.

[jerry]

I wonder if anyone has asked teh young people. Maybe they have other reasons.

[David Moles]

"which is a very dubious policy on the inequality front, because it starts with a honking huge transfer from the average taxpayer today to the relatively rich well-educated of tomorrow."

So we combine it with a honking huge increase in social insurance, timed to kick as those well-educated of tomorrow start paying taxes.

I don't see how this is qualitatively different from the way we've already made K-12 education free. Plenty of people oppose that on the grounds that they either don't have kids or their kids are out of school, but they still get the benefit of living in a society of the comparatively literate and numerate.

[jerry]

One way to make college and graduate education cheaper is to open it to the free market.

Replace offers of "tenure" with offers of "terabyte server".

Academic freedom is largely meaningless in a world of think tanks that can provide academic positions without the bothersome students, and in a world of the web in which self-publishing and open source publishing are the order of the day.

Tenure is really there only to keep a non-transparent old boys network in place. And in many fields, womens studies, economics, law and probably others, we can see that tenure acts to keep reality out of the classroom and out of the theories.

[Sid]

"...by making higher education free..."

Why not simply expand the student loan program to cover total cost of a four year education (tuition, books, room, board), and let "the relatively rich well-educated of tomorrow" pay it off. The whole thing could be handled by the IRS, since they are collecting money from each worker already.

[Mike Williams]

Most of of the development literature points to the problem being more in the demand for skilled than the supply. Firms in the developing world don't have the certainty to run skill intensive businesses so even if there were more skilled workers, it wouldn't necasarilly lead to higher development.

[Quinn Mallory]

why do you think the transfer is from today's taxpayer? how about the government issuing long-term education bonds to finance such a program? today's taxpayer has already passed on quite a lot of debt to the future taxpayer. quid pro quo, no?

[Michael Bishop]

The problem is not that too few attend college, but that too few are prepared to take advantage of college (or technical training).

We must invest more in young children. Then it will be sensible for them to invest more in themselves.

[vtcodger]

***which is a very dubious policy on the inequality front, because it starts with a honking huge transfer from the average taxpayer today to the relatively rich well-educated of tomorrow*** It does Whaaaat??? If the transfer happens, it will be from the wealthier tax payers, not the "average tax payer". Income inequality in the US has reached the point where the typical tax payer (which is what used to be meant by the phrase "average tax payer"), doesn't pay all that much in taxes other than payroll taxes. And they don't have all that much to pay with. Yes, tax rates on the wealthy are low by historical standards, but most of the taxes are paid by the well to do because they have most all the wealth. Am I troubled by transferring wealth from today's wealthy to tomorrow's rich well-educated? Nope. If I have a dog in that fight at all, it's tomorrow's rich mutt, not a today's rich mutt.

[Gisela F]

Perhaps many young people just don't have the money, and don't think they can get the money, to go to college.

Loans terrify people right now, because jobs are disappearing. Loans are often used as a way to send people deeper into debt. I think many people are just hanging on, if that. College is a luxury to them. They are most immediately concerned with keeping a roof over their heads.

If someone is drowning twenty feet from shore, and you throw them a fifteen foot rope, they will still drown.

[jerry]

http://www.guardian.co.uk/world/2008/may/11/spain.france?gusrc=rss&feed=networkfront
After the boomers, meet the children dubbed 'baby losers' | World news | The Observer

"
After the boomers, meet the children dubbed 'baby losers'

Across Spain, France and Italy, young middle-class professionals with good degrees and diplomas are facing a lifetime on low salaries with unrewarding jobs, forever poorer than their parents. Investigation by Graham Keeley in Barcelona, Jason Burke in Paris and Tom Kington in Rome"

As Europe goes, so goes the United States?

Like I said, has anyone asked "teh kidz?" They may be smerter than us, and no matter how free the turd ice cream is, they may sense it is still turd.

[David Lloyd-Jones]

The problem with financing everything through loans is that it assumes locking everybody into the jobs economy. It is the methodology of a unitary corporate state.

Since the point of liberal education is supposed to be the empowerment of free individuals, what we have here is a foundational contradiction: the idea is nuts from the base up.

[Matt Austern]

Surely part of this is because (as you touch on in one of your other college posts) that this is a positional good. Some fraction of our jobs are high-status, and they're reserved for people with high-status education. At a time when only a small fraction of people got undergrad degrees, we could just say that an undergrad degree is high status in itself and that anyone with such a degree will get a high-status job. Giving everyone a college degree won't mean that everyone will get the benefits of a high-status education, though, because by definition not everyone can be high status. It'll just mean more differentiation within the set of people with those degrees.

[Lord]

What is the skill premium if you exclude the top 1% whose results have little to do with skill? I expect the skill premium is much lower than commonly quoted.

[Lord]

Or even better, the median skill premium.

[Maynard Handley]

"The earnings premium for skilled labour has increased dramatically in recent decades. Yet... Americans are not acquiring significantly greater skills in response to this change.... "

(1) People are not homo Economicus? Damn, this is a new and amazing insight that, I dare say, have never before been imagined. Someone alert the media.

(2) There is an implicit assumption here that "skills" are something that can be picked up by anyone with

[Maynard Handley]

WTF Brad? MT just cut off most of a very long carefully thought out comment.
OK the summary:

What exactly are "skills"? The whole post is predicated on this vague entity that is never described. This is like the crappiest sort of social science where papers drone on and on about some weird entity that's never accurately defined and could mean anything.

How about we get some details on
* What EXACTLY are the "skills" we are talking about here.
* The extent to which these "skills" are actually something that can be learned (as opposed to things like connections), and that can be learned by most people in college (as opposed to things like advanced mathematics)
* To what extent are their gatekeepers preventing larger cohorts (most notoriously the AMA doing whatever is necessary to limit the number of new doctors in the US)
* To what extent the premium these "skills" command would drop were the number of new practitioners to grow substantially (cf web developer salaries from 1995 to 2005).

[Mats]

Economics matters little for life choices. There is no learning about the market since you only get to choose once. Hence even in free market U.S.A. there is mandatory basic pension savings, right? And mandatory basic eductation? Thougth so!

ABL refers to "parental education" as a factor behind "skill acquisition" and there you are - if we cannot learn from experience we have to trust it that our parents did it the right way. I guess this is central to the "class" discussion in the European (?) left. Working class parents tell their children how bad it is to study too much. And social-democratic parties and organistations try to break the spell by educating the masses.

Not only are education at all levels free in the welfare state - the government also subsidizes student loans for most students who could not otherwise afford their living.

My guess is that this is the welfare states only strong economic advantage to the U.S. and basically explains why we are not that far behind despite dead weight losses incurred by steep labour taxes.

[Psychohistorian]

There seems to be the distinct possibility that skill crystallizes at a certain point; if you start high school with the skills that another person had in the fifth grade, you may simply never catch up. Regardless of the premium, many people simply do not qualify or will not excel in higher education. Since kids and teenagers often do not understand or appreciate the motives of the future labor market and thus how hard they should be working to learn in grade school, this would explain the inelasticity.

It would also suggest that subsidizing college would simply dilute the use of a college degree, and increase (or concentrate) the premium for those who go to elite universities.

The real solution would be to reform or otherwise improve lower-level education, as difficult of a goal as that might be. If people had the skills to get into good colleges, then the market incentives should be able to work their magic.

[ziggurat]

Student loan growth has enabled colleges to increase costs without serious resistance. 18 year olds have no chance of borrowing significant amounts of money for anything except education. A debt financed college education is about the most leveraged speculation that could be made. And the loans can't be discharged through bankruptcy. In the worst cases, there are the equivalent of NINA (no income/no asset verification), no money down mortgages. Think of the documented cases where people have borrowed tens of thousands to attend culinary school. Instead of colleges having to make the truly hard choices that are made daily in the private economy, they have been able to pass along costs by allowing the students to lever up with publicly guaranteed loans. The more elite universities are still good 'investments' for many students. However, costs have risen to the extent that more and more of the returns on that investment are extracted by the colleges, largely via student loans.

[dave.s.]

Largely missing from this discussion is the idea that half the kids are below average. Below 100 IQ. The Army has decided that it really cannot make an artilleryman of someone with an IQ below 92, and that's their cut-off. Still 35% below that. So no matter how much education some folks sit through, they won't get to a place where they can do high-intellect-demand jobs. It's not in their interest to go and indenture themselves for the next 25 years paying of student loans which have done nothing for them.

[pashley]

"earnings premium for skilled labor" Alot of devil in those details. What is skilled labor?

"Skilled labor" is the professions that have restricted access to their ranks by professional qualification. By definition, their intent is to create shortages of their services, not leaving it up to supply/demand. So instead of measuring skilled labor, you are measuring the premium charged by occupations in a regulated labor market, much like a medieval guild.

Skilled labor is restricted by college degree (time and expense), professional certification (time and expense), artificial restrictions unrelated to expertise (criminal record, child support, command of English), politically correct views in the certification process, reverse discrimination on the basis of race or nationality (white, Asian).

On the reverse, where skilled labor fails to mobilize sufficiently to restrict access, they are diluted by immigrant competition. Scientists enginners, and IT workers come to mind. Consequently, it makes
economic sense to avoid skilled professions whose compensation does not sufficiently compensate for their decreased earning power.

[Ulrich]

I'm one of "teh young people." I am not trying to get a college degree because I believe more people are going into college than there will be jobs for them, especially with increasing international competition. So, I figured I would be better off developing other skills - things not taught in colleges that I figured would be more in demand than in supply.

[Darren]

In Canada, particularly in Western Canada... the earnings of skilled tradespeople with high school degrees stomp ALL OVER those of the median college grad. I know plenty of people with well-into-the-five-figure student loans working at mediocre service jobs who will NEVER (barring a miracle) earn enough to repay the loans.

How do economists miss this? Because they look at "average" wages of college grads, which are distorted by the handful of winners at the top.

College, frankly, is a fraud and a lousy investment (and I say this as someone with two degrees and paid off loans). This system, where productive young adults spend 4-6 years on very unproductive education, is not going to last much longer.

[Andrew]

Um, you're trying to make reality fit a simplified economic theory.
For example, dentists can make a lot of money. Theory says more people will become dentists until the wage becomes average. Reality says most people don't like the thought of looking into other people's mouths for a living.
Were you a rational economic actor at 18,19,20? Could you even define "rational economic actor"? Is money the only factor?
How does free education help if you don't want the job? It could mean less practitioners per dollar spent on education because there's less personal investment spent acquiring the knowledge.

[Nick Bradley]

Why have I never seen a proposal to build more universities? While State and Federal Governments pour ever-more money into higher education, there have been very few new 4-year+ universities built -- only community colleges.

And what has been the result? Too much money chasing too few goods -- massive inflation in the cost of education. Now, I think that the Government should get out of the education racket all together, but Federal higher education dollars would be much better spent by financing the construction of new 4-year+ colleges. We could shift the $50 billion in annual federal higher ed spending towards an Education Investment Bank (EIB) that could make interest-free loans to state and local governments to build new universities and operate them for a limited time. Such financing would reduce the cost of borrowing by state and local governments by 2/3rds (0% interest on a 30-year bond vs. 8%). The money saved through cheaper financing can be passed on to students through lower tuition costs.

[johne]

"...a very dubious policy on the inequality front, because it starts with a honking huge transfer from the average taxpayer today to the relatively rich well-educated of tomorrow."
Couldn't that have been said of the GI Bill in the late '40's?

[W. Kiernan]

BDL: "...a very dubious policy on the inequality front, because it starts with a honking huge transfer from the average taxpayer today to the relatively rich well-educated of tomorrow."

Thirty percent of families in the U.S. have an income less than $27,500 a year. Most of the children in these families realistically conclude that they can't afford college, period. Have a look at the bar chart on this page:

http://www.epi.org/content.cfm/webfeatures_snapshots_20051012

How it would increase inequality to give the children from these families a chance to go to college, as ninety-nine percent of the children of the wealthiest five percent of families (lots of them having neither academic interests nor aptitude) do automatically? If you are concerned with inequality in their _future_ earnings, just raise the tax rate on the higher incomes to pay for the educational subsidy.

[Alex Tolley]

(my comment cross posted from Mark Thoma's blog)

So the drop-out rare increases, leading to lower wages, leading to even higher drop out rates in the next generation. I don't suppose that the rising wage inequality and poor real gains by median earners for three decades has any impact on whether some kids see much point in graduating high school? Kids can see that their hard working parents with college degrees are capriciously laid off, and can rightly ask themselves, is there a better way? The media nicely reinforces this with fare revering the winner takes all professions - entertainers, athletes - and kids can rightly ask themselves why not try for the brass ring, and these professions don't even require degrees, just talent.

I think there has been a noticeable decoupling of the educational work effort and the rewards over my lifetime. Arguing that education leads to better rewards based based on aggregate statistics just misses the point - the variability is just huge, so that making decisions like this cannot be done when luck plays such a large role. Add to that the increasing cost of education borne as debt, and the risk/reward ratio stars to look like gambling.

I recall a study in the UK from the 1980's (?) that showed that the lost income from acquiring a degree was only recovered by the time you were in you 40's, and a PhD into your 60's. This when university education was largely free and the costs were the lost opportunities of earning after leaving school at 18.

[jerry]

The best software engineers I have met were physicists, mathematicians or aerospace engineers. The worst were computer science majors.

But the guys without any degree? They were much much closer to the best than they were to the worst.

I think the college education raises the probability you will find a high paying job, but as Alex says, given the layoffs and all the other shit, it's not clear at all to me, that for the monetary reward considered by itself, that a college education is worth it and that young people are not perceiving it correctly.

(All else being equal I don't think it should be free. I am certain I am a lazy sob, but unless there is some opportunity cost involved, I just don't see students involved with sex/media/drugs/other stuff taking a free class seriously. And that would probably make classes worse for everyone.)

[Doug K]

"The earnings premium for skilled labour has increased dramatically in recent decades."

As Maynard and pashley already pointed out, the definition of 'skilled labour' in the paper is impenetrable, and a lot depends on that definition.

For evidence that the 'earnings premium' is there, they reference three papers by Katz et al, two of which were conducted in the 90s when we (college grads) were all going to become highly-paid symbolic analysts. That myth has been thoroughly exploded by now - 'skills' turns out to mean 'connections'.
http://www.prospect.org/cs/articles?article=schools_as_scapegoats

Education costs have been rising much faster than salaries. It's an easy calculation - look at the BLS statistics for jobs requiring degrees, then look at the cost of that degree. After paying off student loans for twenty years, do you really come out ahead ?

The easy way to change market inequality, is to change the laws that produced it.. 'skills' don't determine how wealth is distributed, political power does.

[pnewman]

The reward is not for going to college, it is for _graduating_ college. If you know that you are unlikely to graduate from college than it may not be worth the opportunity cost of going to college.

Until there is a study saying "Hey kids! Go to college for a semester and drop out, having flunked half of your classes! You'll make 2% more every year for life!" Than why go if you know you're unlikely to finish it?

Another consideration - Evolution doesn't select for attending college, evolustion selects for having lots of kids who survive to have kids of their own. College graduates have fewere kids than non-graduates. Therefore going to college is a bad idea evolutionarily. "Quit school and have lots of kids! You may be poorer but your genes will rule the future!"

[Neil B.]

I don't know why people think there's such great rewards for graduating from college. I have a BA and a hell of a time getting good work, above the $11/hour range (in VA.)