Structural unemployment in black and white

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%.

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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?

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Our unemployment number is an average of all segments of the population, including the (tiny) segment of people with Ivy credentials and technical degrees.  (See diagram on the right.) 

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? 

Comments

[Don Shula]

This is so basic that it is sad that it needs to be expressed at all, but once a week someone like Ryan Avent or Felix Salmon will say "but still those with college degrees....(nonsense blabber blabber)".

[Freddie]

Can you refer to actual, real-world studies rather than refuting vague anecdotes, please? College graduates earn more than non-college graduates and have a lower unemployment rate than non-college graduates regardless of the relative prestige of the college they graduate from and after correcting for selection bias and ability effects.

You cannot deduce the real world. Go read the empirical studies and identify specific problems in their methodology or produce empirical studies of your own. Otherwise, you're just blowing smoke. Empiricism is the only way to understand the world as it actually exists. Deduction without evidence, such as what you're asserting here, is useless.

[AxelDC]

This assumes a very static view of college. If all workers had college level educations, we would have a far more flexible, innovative workforce. Higher educated workers are more productive at every level of the supply chain.

You will never have 100% college graduates, because by definition college requires a minimum level of intelligence and dedication. The vast majority of people are not cut out for college. The concern is that college-able students are excluded for non-meritory reasons, largely economic. That damages your economy and limits your social mobility.

The US has the highest worker productivity because we have the highest percentage of college graduates. There is no evidence that we are oversaturated with education, but going the opposite direction due to excess tuition will truncate US growth potential

[Kaiser]

Freddie: the issue is not whether college graduates as a whole earn more or have a lower unemployment rate than non-college graduates. No one is disputing those studies. If you click on the links of my previous posts, I use empirical data to refute the assertion that promoting more education will solve our unemployment crisis. That assertion results from, as I state here, the fallacy of taking a correlation and assuming there is a cause-effect relationship.

Also, deductive reasoning is valid when we are talking about laws. Unless you don't believe in the law of supply and demand, then the observation that wages are not increasing for college grads indicates that there is no excess demand in the college-grad job market.

AxelDC: yes, evidence has started to come out that the so-called "recovery" has been happening at the lower end of the salary scale, that it is not the college graduates who have been experiencing job gains or salary increases. If there are more jobs than college graduates available to take them, we should be seeing an increase in average work hours and average salaries for that segment.

[Don Shula]

Freddie the studies aren't able to observe the data that would make the point. Such as how does the 5 year trained accountant with all the amassed debt (public and private) do vs. the accountant that the Big 4 trains on the job out of high school to do the same task. The latter is the scenario reformers want tested. The "empirical" studies will compare a bookkeeper vs. an auditor (with controls for skill level) and show the still massive disparity and a blogger like you will say "see, what would you tell your kid to do?" So irrelevant.

I would like to see a study that takes the 50-60% of college dropouts and compares their financial and career outcomes with the top 10% non-college trained BUT (and this is important) well advised and technically trained (OTJ or short term professional school). The studies show that even "some college" is beneficial, but that is silly and comes from lumping all non-college sloppily together.

Lumping all non-college graduates is silly. It's the "some college" vs. the upper 10% of "no college" (who are given a career track) that's important. That would show the waste I'm sure. 6 hours of Astronomy and college algebra can't lift your value to the economy. Most studies and studiers don't want to lump the data in such a way to show that we could make college unnecessary for maybe 85% of us. Their studies just confirm the social punishment of not going to college and the innattention and lack of imagination for what to do with the bulk of humanity. Yale or Jail.

Trust me I am part of a system that does this to urban blacks. We show them your typical charts knowing full well they will be chewed up and spit out by college. Broke "losers" with no future. It makes me ill.

[Taggert J. Brooks]

Kaiser- If there was only a demand side, you would be correct. But there IS a causal reason why increased education increases employment. It provides people the skills to give themselves a job! http://www.jstor.org/stable/2109594 For example. They have better access to capital. They are more entrepreneurial Banks are more willing to lend to them...because hey they have a college degree, and they could always get another job to pay the bank back. I'm not saying that would solve our problem, clearly demand still matters, I'm just saying it isn't the only thing that matters. Think of a simple labor market supply and demand curve. If the supply curve doesn't shift...as in they move from one bucket to another you are right. Eq. quantity of labor is the same, even though the composition of the supply curve is different. However, increasing college grads is clearly a rightward shift in the supply curve! (unless you believe college is only a screen mechanism, and involves no human capital increase).

[TESOL certification]

More college grads per se does not create jobs, but obtaining training in skills demanded by employers will improve the odds of landing a good job. College grads are more likely to have the skills needed for outstanding jobs than non college grads. Liberal arts degrees can be promoted into teaching skills by getting a TESOL certificate.

TESOL certification is a way to teach overseas, travel the world, and get a job in a tough economy. College graduates with 4 year degrees and a TESOL certificate are in great demand. As in all professions, the more experience and better the academic qualifications, the better the job which can be obtained. However, there are many jobs available which do not require a teaching certificate and teaching experience. There are even some jobs which do not require a university degree. Most all jobs which pay a decent wage require TESOL certification a 4 year bachelors degree. College graduates between the ages of 20 and 30 are most in demand.

[excel development]

Structural unemployment results when there is a mis-match between the skills people have and the skills people want. Federally funded job-training programs.... Because this will allow people to learn the skills that employers demand. Shelly is looking for work but never finished high school so her skills are limited. Here is a case where Shelly wants a job, but lacks the skills employers demand.