Why the current revenue model of higher education is in trouble

by on October 27, 2011 at 9:39 am in Economics, Education | Permalink

The picture for females is also not pleasant, all from the excellent Michael Mandel.  Those are simple facts, denied by some.

Non-college grads also have seen declining wages, and so one can look at the “finish college vs. finish high school only” margin and conclude that the return to higher education is robust.  Another approach is to look at the “finish college and get on a real career track” vs. “finish college and hang out” margin and conclude the sector is in trouble, which indeed is the case.  Don’t get stuck looking at the old margins only, the new and powerful margin, I am sorry to say, is relative to unemployment or extreme underemployment.  The status and avoid-shame returns are high enough to keep a lot of people going to college, at current prices, but the falling real wages for graduates aren’t going to sustain an enormous amount of extra sectoral growth, including on the price side.  Nor do I expect the preceding orgy of student debt to repeated, at that level, anytime soon.

Thomas October 27, 2011 at 9:46 am

The “orgy of student debt” is slowly becoming federal government spending washed through students. There’s no reason to think that that will slow down anytime soon.

dnb October 27, 2011 at 9:48 am

No worries, I got a graduate degree.

Ted Craig October 27, 2011 at 10:02 am

No worries for now.

Padraic October 27, 2011 at 9:51 am

I’m disappointed you would use a graph where the x-axis is non-zero.

Finch October 27, 2011 at 10:20 am

Oh come on…

Because all time series have equal variance and the test of statistical significance is whether you notice the wiggle on a three inch by three inch graph plotted from zero?

Srsly October 27, 2011 at 1:41 pm

It is significantly less alarming when you visual 2+ blank graphs worth of space below it…

Finch October 27, 2011 at 2:18 pm

Fine. Should it be less alarming?

Dath October 27, 2011 at 4:48 pm

It’s *very* alarming if you fall within the demographic.

dearieme October 27, 2011 at 10:23 am

I’m disappointed you would refer to the abscissa as the x-axis.

Andrew' October 27, 2011 at 10:28 am

I don’t know anyone well enough to be disappointed or not.

Troy October 27, 2011 at 10:38 am

I’m surpirsed the scale is not logarithmic! After all, we only care about growth rates…

John Personna October 27, 2011 at 10:47 am

Eyeballing it, a 16% decline from the recent high is not some noise that would (should) disappear in another presentation.

Cyrus October 27, 2011 at 10:53 am

If it’s the margin that’s of interest, a zero x-axis is seldom the correct choice.

SteveB October 28, 2011 at 8:00 am

I’m disappointed you would use a graph where the y-axis is non-zero.

ezra abrams October 28, 2011 at 6:46 pm

read orwell on grammar mistakes: it is better to violate almost any rule of grammar then say something outright barbarous.
or, ignore tufte, overblown windbag, and find the excellent book by the lady from SAS; as she points out, it is a common fallacy to think that a graph has to start at zero.
The point of a graph is to say something; sometimes you need to break the rules to get the right message out

what makes your comment sad is that you missed the 3 or 4 real errors: no comma on the Y axis values; X axis values not aligned to tick markes (excel fail) data given as line with stupid extra shade formatting rather then simple points; no label on x or y axis; the lack of a Y axis label is ok, but the lack of an X axis is not, as one has to guess that the x axis is year of graduation (although this one does better then a lot of econ graphs, at least it is clear, so I’m inclinded, against my better judgement, to give the author a pass on the lack of axis lables); unit divisions on Y axis are odd – I think by 5,000 dollar increments would have made more sense

PS: I hold myself, in a casual blog post, to a lower std then a graph that is read by a lot of people

celestus October 27, 2011 at 9:51 am

Don’t worry, the government will happily lend you money to go to college as many years as you want and only require you to pay it back if you get a job that pays more than the median.

Eddie October 27, 2011 at 12:52 pm

I dont disagree with your implied sentiment that there is too much government lending to students, but you are incorrect in that it is extremely hard to discharge student loans. It is one of the only types of lending that is impossible to get rid of through bankruptcy. Whether that is good or bad I’m not sure, but it wouldn’t be an issue if students didn’t have those debts in the first place.

Cliff October 27, 2011 at 2:51 pm

They have a program that allows you to pay them back based on your income and have all remaining debt discharged in 25 years. Obama is proposing lowering the amount you have to pay and decreasing the time to automatic discharge of all remaining debt.

Dan Weber October 27, 2011 at 5:44 pm

Something designed to make it even easier to students to be in hock to their schools sounds like a bad idea.

We need some price pressure on education, not someone propping up the prices.

Benny Lava October 27, 2011 at 8:30 pm

Is there? I have never heard of this. Do you have some proof of this program?

Randy October 27, 2011 at 9:31 pm

Celestus and Cliff are exactly right on all accounts.

http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jsp

Randall Parker October 28, 2011 at 12:10 am

The better policy response would be to stop lending people money to get expensive degrees that won’t pay much.

Steven Kopits October 27, 2011 at 9:55 am

I’m not sure that the picture is much better for a number of masters students either. I’ve just hired a very qualified analyst, pretty cheap compared to the skill set. But that’s life right now.

I hear that IOC’s are giving $115k for geology masters students right out of school. That’s where the action is. Not bad to be a petroleum engineer either.

What to help graduates? Increase the growth rate, reduce transfer payments (because those will later be taxes), consolidate the fiscal situation. The easiest remedy? Increase oil production, to give us the fuel to grow.

Jim October 27, 2011 at 10:52 am

>I hear that IOC’s are giving $115k for geology masters students right out of school.

Why is the International Olympic Committee hiring geology majors?

Joe October 27, 2011 at 12:51 pm

I don’t know, but Integrated Oil Companies are…

Randall Parker October 28, 2011 at 12:11 am

Steven,

The easiest solution: Build bike paths so that people don’t need as much oil. Get bikes and pedestrians faster ways to go places without getting near dangerous cars.

Mike Hammock October 27, 2011 at 10:14 am

Maybe I’m misunderstanding the explanation, but does this sort of data control for the fact that college graduates have a lower unemployment rate than people without a degree? A greater chance of staying employed is a benefit that may not appear in wage data.

Nicoli October 27, 2011 at 10:22 am

Makes me wonder what I should do with my life career and education wise. I have an MA in Econ, but not from a top school. I worry that the trends above will gradually expands as master’s degrees become the new bachelor.

dearieme October 27, 2011 at 10:25 am

Be like the most famous economists: be economical with the truth.

Pat October 27, 2011 at 10:30 am

Does the data go back further than 1999? Lots of software companies hiring anyone to write code back then. Also, starting the axis at 55k makes it look worse than it is.

happyjuggler0 October 27, 2011 at 11:49 am

It is painful to view a graph which starts during a bubble top. It is also painful to view a graph like this that doesn’t include recession bars. If there are downturns not just starting in the 2001 recession and the most recent one, but also previous recessions, then it may well turn out to be cyclical, or at least partly cyclical, instead of a purely secular trend.

Troy October 27, 2011 at 10:34 am

I guess I shouldnt pursue that Masters in Applied Econ degree… Oh well I really didnt know what type of job I would get anyways.

EdwardBurke October 27, 2011 at 10:40 am

To what extent does or could this speak to the continuing devaluation of post-secondary education? Specifically: the US continues to spend hundreds of millions, probably untold billions by now, each year on–POST-SECONDARY REMEDIAL EDUCATION! I spit on the very idea of post-secondary remedial educaton the first time I came across it decades ago, and it’s STILL thriving. Why, in the name of God and the Federal Treasury, is this done? How in the world can anyone requiring remedition on the very threshold, at the very outset of his baccalaureate career, be thought to be in position to profit from a baccalaureate program? (No, don’t tell me that remedial programs are now offered for graduate students, too . . . .) How can anyone think that colleges/universities have any business administering such programs, with the innate efficiencies and administrative prowess they commonly demonstrate? Plus, has anyone studied the actual outcomes (I can’t bear to): what sterling degrees and competencies emerge from this devaluing investment in the further propagation of intellectual dimness? Does the NCAA pay for all of it? any of it? Who, besides the Federal governement and tuition-paying parents and earnest students earning and paying their own ways, does pay for it?

Randall Parker October 28, 2011 at 12:14 am

This is Lake Woebegone education where all students are imagined to be above average.

Kasen Wally October 27, 2011 at 10:47 am

This is bad news. I’ve been privy to the fact of enormous debt being racked up by college students. Some might even say College is a “Debt-trap” of sorts. With sky rocketing tuitions the fact that college graduates are entering a volatile market where declining wages may mean even more trouble. Granted many colleges are being forced to raise tuition, however it still presents a big problem, with great debt comes a great inability to pay it off effectively.

“In California, unprecedented budget cuts to higher education have led to huge fee increases at the state’s two public university systems, as well as layoffs, furloughs, enrollment cuts and reduced course offerings.

At the University of California, which has 10 campuses and about 220,000 students, in-state undergraduate fees in fall 2010 are set to reach $10,302 – 32 percent more than in fall 2009 and three times what California residents paid 10 years ago.” – CBS News

This rising trend in my eyes defiantly means problems in the future for college students, many of whom are already struggling. Specialization may mean high paying jobs for some, but for most the combination of rising tuition costs and declining wages is most defiantly a bad thing. I hope that in my next few years some changes will occur that will benefit my weak financial situation. However that may just not be the case.

Kevin C. October 27, 2011 at 8:07 pm

“This rising trend in my eyes defiantly means problems in the future for college students, many of whom are already struggling.”

I think you want the word “definitely”, not “defiantly.” (Unless you mean to say that the trend means problems ‘in a defiant manner.’)

Randall Parker October 28, 2011 at 12:16 am

The UC had to get tax funding cut in order to pay pension funds of public employee retirees. Pension fund liabilities are going to drive many California cities to bankruptcy including San Jose and LA.

Nicoli October 27, 2011 at 11:03 am

I assume that most of those with a college degree also receive medical benefits, which have become far more expensive to employers over the past 10 years. I wonder how much, if any, the above chart would change if you took that trend into account.

Rahul October 27, 2011 at 11:42 am

What does the college-tuition fee curve look like?

realist October 27, 2011 at 12:06 pm

Isn’t this occurring because college enrollment increased over this time period without a corresponding improvement in the intelligence, preparedness, work ethic, etc of high school graduates. And there haven’t been much of an increase in the number of spots at good colleges. So the quality of the marginal college graduate almost certainly fell over that time period. You can’t blame employers for not falling over themselves to hire someone who barely graduated with a BA in drama (or business)from East Armpit College .

That said, we are in the middle of the worst job market in the last 25 years.

EdwardBurke October 27, 2011 at 12:16 pm

Additionally and alternatively: at no time between the ages of 25 and 34 did I ever come close to making an annual salary of $67,000, $73,000, or even $59,000, nor can I say I attained any such salary level in the historical period 1999-2010 (I speak as a male college graduate, with an MA humanities degree). Any 25-to-34 year old male college graduate with an annual salary above $50,000 has little to complain about, even in today’s economy. Question: what kinds of jobs do 25-to-34 year old male college graduates have (or what types of jobs did they have 1999-2010) to achieve annual incomes of c. $67,000, $73,000, or $59,000? or do the data conveniently fail to report those details?

Nicoli October 27, 2011 at 12:31 pm

Males with high annual incomes are probably more likely to have non-humanities degrees such as CS, engineering, or finance in expensive cities. They may also be more likely to drive fuel trucks in Afghanistan.

Randall Parker October 28, 2011 at 12:19 am

It is really really easy to learn that STEM grads make far more than the averages cited above. Google search (or even Bing search) is your friend. A petroleum engineer making less than $100k isn’t trying very hard.

J1 October 29, 2011 at 10:33 am

The problem with articles like this is they act like all degrees are the same. I find it difficult to believe you seriously thought someone with a masters degree in any humanities field was going to make anywhere near what somebody with a B.S. in engineering would make. Also, as Nicoli points out, males are far more likely to be in high risk jobs that pay really well.

Cato the Younger October 29, 2011 at 11:47 pm

My son was making $80,000 at age 23 and tops $100k a few years later. Got a near-worthless Psychology BA. Super-entrepreneur? Three jobs? Nefarious illegal activities? Fuel truck driver in Afghanistan? No, but he is a federal contractor and for security reasons he can’t tell me what he does. That’s the job-path to take in the current unsustainable bubble, observable by tracking the federal government’s spending 25% of GDP. On the downside, he’s engaged to a girl with nearly $100,000 in debts she could never repay on her elementary teacher’s salary. (I know, I know–I tried to talk sense to him.)

question the question October 27, 2011 at 12:22 pm

Some high-paid, higher education staff sure do seem to have a lot of time to travel, lecture, and post blog entries all throughout the day and night.

A reduction in said staff salaries (and thus higher education expenses for students) seems in order.

Ian October 27, 2011 at 12:23 pm

I’m a 26 year old bachelor’s degree holder, so here is my perspective from the ground. Many from my graduating class (2008) spent the first year or two in the job market underemployed. I can’t say I know many who opted to just “hang out” although, as the article points out, the margin seems to have gotten pretty small. Some were lucky to get on a career track out of the gate, others are just now finding full-time, career track employment. Hence they now have a basic starting salary (at 25/26 instead of 22/23), factor in time-horizon for significant increases in pay, and you can certainly see the average income for this population moving downward.

I suspect a number of causes, but think a significant influence to be the income of those at the opposite end of their careers. I’d like to see the incomes of degree holders still working between the ages of 55 and 70 over the past 12 years. I heard one boomer describe the lack of upward mobility for my generation as the “ass ceiling” for his generation refuses to get their butts out of the chair. If that’s what keeps my income below the historic average for the next several years, so be it. I can at least find comfort in the fact that it’s helping my parents and the rest of their generation save for retirement; since what they had saved either got smashed during the recession, went to helping me pay skyrocketing tuition, or is tied up in the Social Security trust fund.

thehova83 October 27, 2011 at 12:51 pm

demographics really do matter.

I graduated at about the same time. I’m afraid that the generation younger than us will be in a better position (younger, on a better career track) to grab the good jobs when the baby boomers retire than us.

Randall Parker October 28, 2011 at 12:24 am

The bigger problem isn’t older people sitting in more expensive jobs. There is no shortage of demand for young people with the right skills. Petroleum engineering, petroleum geology, computer science, and some other STEM majors pay very well.

Underemployed? What is an art history major or anthro major supposed to do? To put it another way: Why should businesses with complex technical problems and tons of data to sort thru supposed to try to find ways to make anthro or sociology majors useful? I mean, if one has managed to spend 16 years in school without becoming highly productive why shouldn’t the market signal loudly with low salaries for such people that they are making bad educational choices?

bleh October 27, 2011 at 12:58 pm

Hurts my brain to try to reconcile this post with prior posts casting poorly skilled ZMP workers as the losers of the recession — evidence then given being that college grads were doing just fine (by unemployment rate of all grads).

Just hard for me to see this as a coherent platform, both these ideas coming from the same Tyler Cowen. Shouldn’t this post include some mention of ZMP, or even a formal recanting?

The evidence for ZMP theory took a big hit in July when the recessionary productivity + GDP gains were shown to be statistical illusions, and this data just seems to knock another leg out from under it. This data seems more consistent with the idea that college grads have a moderate unemployment rate compared to the catastrophe of the less educated, simply because they are settling for the low skill, low pay jobs that the less educated would normally accept — not because the economy shifted in such a way that highly skilled highly paid workers and jobs persisted, while low skill, less productive jobs withered.

mk October 27, 2011 at 3:18 pm

I would like to second the request for a response from Tyler on this point.

Blag the Ripper October 27, 2011 at 5:07 pm

You’ll both be waiting a long time for this clarification, and when/if it comes, it won’t mean much, as Tyler is the master of talking out of both sides of his ass. He’s a court jester, don’t forget. He’s what the kind of people who are spoon-fed their knowledge by the NYT regard as a “respectable” libertarian, and Tyler wouldn’t have it any other way.

unionman October 29, 2011 at 1:49 pm

Get a life, jackass.

jseliger October 27, 2011 at 1:01 pm

The status and avoid-shame returns are high enough to keep a lot of people going to college, at current prices

One thing I find interesting is how people do not emphasize, or emphasize as much as they should, student choice in college majors and how that affects earnings. I wrote a post on Student choice, employment skills, and grade inflation observing that colleges and universities are, to some extent, responding to student demand for easier classes and majors that probably end up imparting fewer skills and paying less.

From what I’ve observed, even naive undergrads “know” somehow that engineering, finance, econ, and a couple other majors produce graduates that pay more, yet many end up majoring in simple business, comm, and other fields not noted for their rigor. As such, I wonder how much of the earnings picture in your graph is really about declining wages and how much of it is about people choosing majors that don’t really impart job skills of knowledge (cf Academically Adrift, etc.) while leaving plenty of time to hit the bars on Thursday night.

Note too that this is a genuine question: I have no idea of what, if anything, the answer is, or if anyone has done any research on the subject. But I really don’t see enough discussion of how student choices affects these kinds of pictures.

Bill October 27, 2011 at 7:02 pm

Totally agree. You need to control for composition.

Randall Parker October 28, 2011 at 12:26 am

I even meet people with STEM degrees who switch into lower paying easier jobs because they don’t want to think that hard. But they still step down to income levels that are above what the B.A.s in English are getting.

Joshua October 27, 2011 at 1:27 pm

It would be interesting to see the default rate and wages for people graduating with different degrees.

Ian October 27, 2011 at 3:31 pm

I have a Master’s and not only can I not find a career track job, McDonald’s won’t even hire me because they’re so certain that I *will* be able to!

Cato the Younger October 29, 2011 at 11:55 pm

Try Burger King, the place has an employment outreach program for individuals with Masters degrees, Ph.D. candidates, Ph.Ds, and postdoctoral students. Their Double Whoppers are pretty egregious too.

Tim October 27, 2011 at 4:03 pm

Or perhaps it’s the move of colleges from institutions where you learn to think to institutions where you get a vocational degree. If colleges are turning out vocational degree style thinkers then of course their wages are going to go down. They’re commodities. If your thinking isn’t that a bachelor of arts in music degree holder could be the CEO of a Fortune 500 company eventually then you’re thinking of college as a vocational school and your output is going to be easily replaceable and exportable.
This also tracks men. And the US culture has been bad about teaching men to relate to others emotionally which is becoming increasingly important in management and our knowledge economy.

roystgnr October 27, 2011 at 4:43 pm

This hypothesis could be tested by comparing the salary distributions of “vocational” degrees, like an MD or an engineering BS, to those which signify “learning to think”, like your hypothetical BA Music.

I’m not on pins and needles wondering what the results will say, though.

Tangurena October 28, 2011 at 1:00 pm

“Vocational” degrees also include HVAC and automobile repair from the local community colleges. Those subjects *used* to be taught in high schools, but since the 70s, we’ve been pushing everyone to go to college (even if they aren’t college material) because “tracking” is a 4-letter word.

joan October 27, 2011 at 5:23 pm

The message I get from this data is that when people went to collage to learn, it increased their income, but when they go to college to increase their income it does not. The same can also be said about the increasing use of standardized test to measure the effectivness of education. Improving test scores is not the same as improving education if it is done by teaching to the test.. Lucas pointed out this problem in government policies decades ago. but we keep making the same mistake over and over and this time it as left a generation of college students with a mountian of debt. without the income to pay it.

Benny Lava October 27, 2011 at 8:34 pm

Who is Lucas? I am curious because this analysis sounds on target. Everyone born in America over the last 35 years was told at many points that education is the key to success and going to college was paramount to becoming financially successful. Many new college grads would have a better ROI having gone into a trade like HVAC repair instead of the liberal arts.

TGGP October 28, 2011 at 11:13 pm

I’m guessing he’s referring to the economist Bob Lucas. The only other Lucas I can think of off the top of my head is George.

Bill October 27, 2011 at 6:57 pm

Some trends the income data for recent grads the data may not be picking up:

1. Americorp growth and unpaid or low paid internships. Would be interested in seeing composition effects in the measured base.

2. Something new that have not seen before: US students emigrating to Brazil, Bulgaria, etc. To get jobs in their skill areas. We visited some friends in other parts of the country recently who told us about their kids and others kids emigrating!

hb October 27, 2011 at 10:26 pm

It would be interesting to compare the types of degrees to the earnings. Computer Science, Engineering, Nursing: have the number of those degrees declined? Those are the degrees that provide higher salaries straight out of college.

In addition, I believe the time segment graphed is too short. How about a chart of stats since ’79, when middle class wages began their journey downwards?

GTWMA October 28, 2011 at 5:25 am

Does this graph include graduates from the University of Phoenix?

Jim B. October 28, 2011 at 5:41 pm

What garbage empiricism! I’m supposed to infer a trend from the years since 2006 for earnings? I think there *might* be some confounding variables! Maybe looking at earnings gaps is a better approach (if you’re going to be casual). Controlled panel studies would be better yet. You can do better, TC!

ezra abrams October 28, 2011 at 6:48 pm

why is it that there is no clear, simple, easy to find explanation of why college tuition is going up so fast ?
I know that is, in a sense, a silly question: in a free market system, college is worth, by definition, what willing people pay.
However, like a lot of people, I’ve often wondered – is it prof salarys ? admin ? facilities ? extra research ?
just, exactly, where is all that money going to today, compared to 30 years ago

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human mathematics October 30, 2011 at 1:50 am

What’s a real career track? Not everybody working in the service industry (hotels, food service) or construction or working as administrative assistant, is there because they’re “Just hanging out”. I would prefer to be “on a real career track” but have never been able to enter those echelons. (6 years out of college, econ degree)

human mathematics October 30, 2011 at 1:50 am

Point being, looking at those who get on a rich career track as a separate statistical group begs the question.

Dan October 31, 2011 at 9:58 am

HA! I’m one year younger than this age group but I wouldn’t even know what to do with $59,000. I currently make $35,000 after two years in the workforce.

Oh wait, I know what I would do with the extra $24,000…. I would put it towards my student loans…

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