Is the labor market return to higher education finally falling?

Peter Orszag considers that possibility in his recent column.  About one in four bartenders has some kind of degree.  Orszag draws heavily on this paper by Beaudry and Green and Sand, which  postulates falling returns to skill.  It’s one of the more interesting pieces written in the last year, but note their model relies heavily on a stock/flow distinction.  They consider a world where most of the IT infrastructure already has been built, and so skilled labor has not so much more to do at the margin.  This stands in noted contrast to the common belief — which I share — that “IT-souped up smart machines” still have a long way to go and are not a mature technology.  You can’t hold that view and also buy into the Beaudry and Green and Sand story, unless you think we have suddenly jumped to a new margin where machines build machines, with little help from humans.

Rather than accepting “falling returns to skill,” I would sooner say that education doesn’t measure true skill as well as it used to.

The more likely scenario is that the variance of the return to having a college education has gone up, and indeed that is what you would expect from a world of rising income inequality.  Many people get the degree, yet without learning the skills they need for the modern workplace.  In other words, the world of work is changing faster than the world of what we teach (surprise, surprise).  The lesser trained students end up driving cabs, if they can work a GPS that is.  The lack of skill of those students also raises wage returns for those individuals who a) have the degree, b) are self-taught about the modern workplace, and c) show the personality skills that employers now know to look for.  All of a sudden those individuals face less competition and so their wages rise.  The high returns stem from blending formal education with their intangibles (there is also more pressure to get an advanced degree to show you are one of the privileged, but that is another story.)

This polarization of returns — among degree holders — explains both why incomes are rising at the top end, and why the rate of dropping out of college is rising too.  At some point along the way in the college experience, lots of students realize they won’t be able to “cross the divide,” and the degree alone won’t do it for them.  They foresee their future tending bar and act accordingly.

Too many discussions of the returns to education focus on the mean or median and neglect the variance and what is likely a recent increase in that variance.


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