Walk into any introductory economics class across the country and it won't take you long to hear about the law of diminishing marginal returns. According to this law, the production of any good or service reaches a point where each additional (or marginal) unit of the product confers an increasingly smaller benefit. At CCAP, we have released a study presenting empirical evidence pointing to the conclusion that diminishing returns have set in for the increased production of college graduates. We have used data provided by the Bureau of Labor Statistics, its publication The Occupational Outlook Quarterly, and the Current Population Survey, to show that, over time and with increasing frequency, a substantial number college graduates are underemployed (that is, they are employed in occupations which the BLS classifies as below-college level jobs). This sizable and growing underemployment problem indicates that, at the margin, students who obtain college degrees wind up in jobs which they could have held coming straight out of high school.
The occupations held by college graduates have changed dramatically over the last half century. In 1967, the first year of available data, 10.8% of college graduates were underemployed. Fast forwarding to 2008 shows that this proportion was up to 35.3%. What happened during these fifty-one years? The short answer: the United States added 40.6 million college graduates to the work force, nearly tripling the proportion of adults with college degrees. Basically, college graduates were supplied at a higher rate than the labor market demanded, with the predictable result that they were forced to find employment in lower-skilled occupations.
US College Attainment Rate and Percentage of College Graduates Underemployed
In the United States (using 2008 data), we have estimated that there were approximately 17.4 million college graduates working in occupations requiring less than a bachelor's degree (our favorite example: the 317,000 college educated waiters). For historical context, in the not too distant past of 1992, only 5.1 million employed college graduates (17% of grads) were underemployed; if we go all the way back to 1967, this was true of only 953,000 grads. Even as recently as 1998, the percentage of underemployed college graduates was 16.6%, slightly lower than the 1992 level. The growth in these figures suggests that American taxpayers are reaping less of a public economic benefit from their support of higher education.
There are, of course, a number of limitations to the data. First, we are lacking consistent annual data for a number of years, particularly for most of the 2000s; however, we do have enough data to construct some rough estimates for these years. Our conservative estimates indicate that underemployment in the 2000s ranged from 25 to 30%, depending on the year. Second, the data we do have are not at the same level of detail for all years; the year for which we have the most specific data is 2008, so some year-to-year comparisons at the occupational level may not be strictly precise. Third, some have observed (for example, Daniel Hecker of the BLS) that the BLS job classification system is not precise enough to "neatly distinguish between jobs that require a college degree and other jobs." However, other research accounting for different job classification schemes revealed that the upward trend in college graduates underemployment has indeed occurred over time, so this effect isn't enough to account for the data.
Some might say that these data are really the result of frictional underemployment (i.e., eventually these individuals will find college level jobs) and are unusually high in 2008 because of the recent recession. While the recessionary contractions in the labor market are indeed real, it should be noted that the current, upward trend in college graduate unemployment did not begin until after the 2008 financial crisis hit; thus, it is likely that the current rates of college graduate underemployment are actually much higher today than in 2008. As far as the effects due to recessions go, it is interesting to note that previous severe recessions, such as the ones in 1973-75 and 1981-82, did not dramatically spike the underemployment numbers; this suggests that the recent increase in the proportion of underemployed college graduates isn't solely the result of recessionary contractions in the labor market. Furthermore, the 17 million of underemployed college grads in 2008 is roughly equal to the total number of college graduates produced from 1996 to 2008. Thus, the data say that the labor market for college grads is as if every single college grad since 1996 was underemployed.
It's important to emphasize that we aren't asserting that diminishing returns for education are setting in for every college graduate. Rather, these data merely point out that the marginal graduate (for example, the individual with below average college academic performance and potential) does not necessarily reap the large economic benefit commonly ascribed to a college education. Indeed, given the large financial investment such students make towards college (in terms of excessive debt burdens and forgone income), these individuals may in fact be better off economically if they skipped college altogether and found productive employment either right out of high school or after receiving a post-secondary certificate. After all, there is nothing dishonorable about working in occupations requiring less than a college degree. It is indisputable that plumbers provide a necessary and useful service to society; one cannot say the same about a below-average graduate of a sociology department.
In light of our research, we find it difficult to justify public policy aimed at increasing the nation's stock of college graduates as the cure for its economic ills. Although they may be generally laudable and well intentioned, goals such as President Obama's plan to make the United States the world's leader in adults with college degrees are misguided and economically problematic. Increasing the number of college graduates in the labor force may simply raise the rate of underemployment for such individuals and make the stories about hairdressers with PhDs all the more common. In a world of finite resources, in which college graduates are increasingly costly to produce, it is socially wasteful and grossly inefficient to churn out college graduates (on the taxpayer's dime) only to have them wait tables, shampoo hair, and deliver mail. Going forward, perhaps we need to reduce our investment in education and instead divert costly resources to more productive alternatives.
Thanks to Christopher Matgouranis and Jonathan Robe / Blogs Forbes
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