How a Changing Labor Market Affects Education

There are two competing arguments about college these days. Conventional wisdom says that if you go to college, you will earn more money in life overall, and be more likely to have a job. Of course it used to be that college grads pretty much were guarenteed a job, but that seems to have changed.

The other argument is known as the “Higher Education Bubble”. Simply put it says that college is over priced for what you actually get especially since the price has increased much faster than the Consumer Price Index.

Here is a graph showing this.

Can this keep going?

So why are grads having so much trouble finding a job? There are several reasons I think.

The Nature of the Economy is Changing. 

I don’t really agree with the President on most things however he said recently that one of the reasons for high unemployment is that the nature of the economy is changing. I agree. 100 years ago, the US economy was agrarian in nature. Over 85% of the population was engaged in farming. As the Industrial Revolution came about, the business leaders and government leaders knew that in order for the US not to be left behind there we had to convert vast numbers of people into factory workers. To be an effective factory worker you had to be able to read, write and do simple arithmatic. You also had to be able to follow directions without a lot of fuss or questioning.

This need brought about the current system of mass public schooling. In addition to factory workers you needed certain more specialized workers to be doctors, bankers and managers. Therefore the college system was adapted to do this. Even so, you still only needed about 20% of the population to go to college. There were plenty of colleges and since people had to pay for it themselves prices tended to stay reasonable. Of course that didn’t mean that everyone could go. If you didn’t get a scholarship you had better be wealthy. Still, this system worked.

Globalization

So what happened? With globalization, factories began having to compete with others around the world. Because of the high cost of US labor and the low cost of transportation it became more cost effective to make the products overseas and ship them back. This is what is happening.

Now there is good news and bad news on the factory front. The good news is that the factories will be returning to the US in the next 5-10 years. The bad news is it won’t do anything for unemployment because the factories will be fully automated.  Foxconn, the company in China that makes iPhones for Apple is going to replace many (and then most) of their workers with Robots.

Taiwanese technology giant Foxconn reportedly will replace some of its workers with one million robots in three years to cut rising labor expenses and improve efficiency.

The robots will be used to do simple, routine work such as spraying, welding, and assembling, which are now mainly conducted by workers. The company currently has 10,000 robots. The number will be increased to 300,000 next year and one million in three years.

Robots don’t need healthcare plans and don’t form unions. Their reoccuring cost is so low that transportation becomes the biggest cost. Therefore factories will move back to the US.

So what happens then? Our society will be moving from making things to thinking. The ability people will need to succeed in the future will be the ability to solve problems. Our public education system wasn’t setup to teach that. Right now colleges are being given the burden to try to impart that skill but by the time you get to college it’s too late to really learn it. I hear stories all the time about college professors who are trying to teach advanced concepts but their students can’t even write a complete sentence. This means people take longer to finish college and a lot drop out. When they do drop out, they usually have lots of debt.

Higher Education Bubble? 

So many more people want to go to college. The supply of colleges has largely stayed the same though. Online colleges are helping but still the demand has increased substantially. In economics, when demand increases and supply stays the same, the price will rise until it discourages people from buying, thus decreasing demand to achieve equilibrium. What is happening now though is a perfect storm.

1. Lots of people out of work

2. They want to go back to school to retrain for a new job

3. Prices skyrocket as state subsidies are reduced.

4. The government is providing a massive flood of money people can borrow to go to school.

That last part shows why prices keep going up. It’s not your money. If you were already going to borrow 45k a year to attend college, how is borrowing 50k going to discourage you? Ironically, the more the government makes more money available, the worse the problem gets. We saw the same thing in the housing market recently. A glut of no money down loans all guarenteed by the government. Poof! The bubble burst when prices went too high causing people to stop believing. Will the same thing happen with Higher Education? Maybe. It depends on what people think they are getting for their money.

What Are You Paying the College For? 

There has been a spate of stories both on this blog and else where about colleges putting their materials online for free. Why? It’s because we are entering the age of information abundance. It used to be that knowledge was power but that has changed. It’s using that knowledge in creative ways that is power because pretty much everyone has the same knowledge. People would come to universities because that’s where the knowledge was. The actual learning isn’t as important anymore to a university. You can tell because more and more classes are being taught by grad students or adjuncts. Tenured staff is declining. Let’s face it, as long as the student keeps paying for classes, the school is happy. To keep the students happy we have been inflating their grades over time.

in 1990, 52 percent of the students enrolled in Principles of Marketing received grades of A or B; by 2009, 80 percent received A’s or B’s.

I admit that is a pretty cynical view of college and I am certainly over generalizing to make a point. Still, there is some truth there.

Credentialing

So why do students keep going to school? It’s for the piece of paper they get at the end. This is driven by industry. Industries need a certain percentage of the labor market. For example, the number of doctors we need is a function of how large the population is. if we graduate too many doctors in a year, many of them will be unemployed and the rest will have to drop their rates because of excessive competition. When the President says that he wants the goal of 50% of the population to go to college that doesn’t make any sense to me. That won’t increase employment at all. All these studies that say that college grads are more likely to get a job and make more money is generally true but has a big flaw. Why don’t we just give every person in the US a Masters degree? Then they will all make great money and have a job right? No of course not. If everyone has a Masters then businesses will start calling for Ph.Ds. There’s an interesting thread here on the Education Arms Race.

So colleges stay in business because industry uses colleges to identify the top of the labor pool. So here’s where disruptive technology gets involved. What happens if there is another way to identify great workers?

The Merit Based Economy

If you are a business, you often have to take a chance on a fresh graduate of a college. While the school has said they know certain things, you can’t know to what degree so you take a chance. Sometimes though, you can see the skills demonstrated.

In 2005 a young hacker names Chris Putnam wrote a computer virus that attacked Facebook. What did Facebook do? They hired him.

This story happens more and more these days. The Internet allows anyone to create products and therefore demonstrate their skills. Being a very social medium, the Internet tends to expose frauds quickly and rewards the very brightest.

Some of the more innovative ideas are the products of young people below the age of 20. Peter Thiel, an Internet investor has given 200k to 20 young people to drop out of school and start their own companies. Many of them are starting companies with an education focus. In 2 years we will see the results of this experiement. It’s a fascinating experiment. There are going to be alternative ways to signal your skills besides going to college. As these become more accepted by businesses, colleges will have to either reinvent themselves or be destroyed. Just because a college has been around for 300 years doesn’t mean it can’t be disrupted out of existance.

Conclusion 

The nature of our labor market is changing rapidly. Our education system wasn’t designed to deal with the result. Something will therefore come into being to take  it’s place and serve that need for learning.

Imagine how the world will look in 10 years. I will tell you right now that you are probably thinking too conservatively. In the 21st century, the winners will be the ones who realize that anything can change. The changing labor market is a big cloud in the approaching Education Stormfront.