A popular argument is circulating out there. You may have heard this one:
college graduates have lower unemployment rate than non college graduates; therefore, if there are more college grads, there will be more jobs and fewer unemployed.
This argument has been made by many, including Bernanke as I discussed here.
Unfortunately, this is a case of mistaking correlation with causation. Producing more college graduates will produce more indebted young people for sure. Producing more college graduates will not by itself create new jobs, unless you're talking about university teaching jobs in certain departments. The argument would make sense if there were an under-supply of college grads today but reports tell us that the unemployment rate among newly-minted college graduates is about 50%.
Warning: I now provide an unsolicited reply to Michael Kogan, who left the following comment on a blog by Paul Krugman:
Can you elaborate on why the structural unemployment story is false? The link you posted assumes the rate of "progress" is constant. But why should it be so? Many new industries today require half-way literate computer-savvy people. The unemployment among people with Master's degrees is very low - yes it is double what it used to be during Clinton years but it is still very low. And if you ask a more specific question: What is the unemployment rate of people with M.S. in Electrical, Computer or Mechanical Engineering from a top 100 University during Clinton years versus today - I bet you will come up with a very similar number - zero or close to it
This seems like a reasonable question, and I'm sure Michael is not the only one wanting answers.
To paraphrase his question: does the fact that people with Ivy-league technical degrees have close to zero unemployment rate (assuming he is right) prove that we have a "structural unemployment" problem?
In my book, I caution against carelessly throwing around labels (age groups, racial groups, etc.). This is a prime example.
The fallacy in this type of argument can be seen if we use different labels. Substitute "Ivy elite with technical degrees" with "white folks"; substitute "non elites" with "colored folks". The fact is still true: white folks have lower unemployment rate than colored folks. Now, are we going to say the key to solving unemployment is to make colored people white?
Pointing to the difference in unemployment rates between college grads and non college grads and concluding that we should produce more college grads is not logically different from wanting to make colored people white. One is impossible, so is the other.
Here is another view that shows why the math can't work out. The belief is that we can take people from the bucket labelled as "A LOT OF PEOPLE" and move them to the bucket called "A tiny Elite of people..." If we do so, these people will magically find jobs. The more people we shift over, the more people will find jobs!
However, the employment status is determined by a lot of factors, of which the supply of college degrees is but one. There is a fixed number (small) of Ivy-League schools and only so many technical degrees granted (even smaller) per year from these schools. The solution looks nice on paper but it is not practical. It also ignores the fact that many of those who aren't going to college probably chose not to go to college. Just ask Bill Gates.
As I said before, producing more college grads will have two predictable outcomes: lower average salary for all college graduates, and more young people burdened with school loans. I think these same economists will label these "unintended consequences". Should we be implementing policies that have predictable "unintended" bad outcomes?