Has the U.S. 'Overinvested' in College?

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An enormous outcry has greeted the Reagan Administration's attempts to cut back federal subsidies to college education. The Administration has been accused of anti-intellectualism and ignorance of the value of education. Almost without exception, spokesmen for the conventional wisdom have joined forces with colleges and student and teacher groups to urge that no cuts in education spending be made.

Leaving aside the question of budgetary exigencies, there is growing evidence that the United States has overinvested in college education. The realization that neither an undergraduate nor a graduate degree is an automatic escalator to well-paying managerial jobs has created a growing number of discontented, frustrated workers at the lower managerial and upper skilled-worker level--the very levels that are crucial to productivity. One can argue that rather than increasing productivity, higher education and the false expectations it creates are important in explaining the slowdown of U.S. productivity in recent years.

The implication of this argument is that spending on college education should be reduced so that workers will not be educated beyond what the system is likely to require of them, lest overeducation lead to still greater discontent and still lower productivity.

In the past, education was the key to advancement. College graduates were demonstrably more "upwardly mobile" in occupation, income, and social status than their contemporaries who did not attend college. Those high returns, plus a flexible, easily accessible higher-education system, led to growing college enrollments. For the most part, the newly trained and credentialed graduates realized the American dream as the economy flourished. But what was true when only 5 percent of the population went to college is not true when 50 percent attend.

Two reasons why young people should seek a college education are often advanced: First, the experience is personally rewarding; and second, a college degree will enhance the possibility for higher future earnings. Both represent returns on the investment of time and money based on the assumption that something of value will be obtained.

Unfortunately for today's students, the return in dollars from that investment has been falling steadily and sharply for more than a decade. Twenty years ago, the average college graduate was earning 50 percent more than the average high-school graduate. Since then, the difference has halved. Today, a significant percentage of college graduates could have done just as well with only a high-school education, thus many young people are acquiring education--at a growing cost to them and their parents--only to find that they have not significantly improved their situations.

The public hears about the more bizarre cases, such as the taxi driver with a Ph.D. in history or the self-employed chimney sweep with an honors B.A. from an Ivy League college, but of more significance is that the average investment in a college education yields a return below other available investments. For many people, it is a downright loss. By the mid-1970's, when the effective yield on many government securities was consistently 12 percent and higher, the rate of return to individuals for investments in college education was consistently below 10 percent and falling.

Moreover, we are witnessing a mismatching of skills with jobs. That is, members of the U.S. labor force have become progressively more overqualified for the jobs they hold. Mismatching is greatest among college graduates. According to a study conducted by Clifford C. Cloff and James W. Shockey in 1980, nearly 50 percent of U.S. workers with 16 years of education or more were overeducated for the jobs they held. Among those with 13 to 15 years of education, some 30 percent were mismatched; while among workers with only a high-school education or less, only 10 percent were mismatched.

These findings support the notion that people are often not employed in the jobs for which college trained them. It follows that they are not receiving the rewards they expected either.

That conclusion raises an interesting question: If returns on individual investment in education have fallen so steadily, and prospects for graduates are so dim, why do young people continue to pursue a college education?

The active role of the public sector in encouraging them to enroll is one reason. The government has lowered the cost of college for some--through direct scholarships, grants, low-interest student loans, and subsidies to colleges--and through various educational and counseling programs it has propagandized the advantages of a college education. Total enrollments, and the federal role in education spending, have increased dramatically as a result.

The presumed beneficiaries were the youths of America; the immediate beneficiaries were the colleges, universities, and their faculties. It always appeared that there was sound economic reasoning for such public support. The "economics-of-education" paradigm seemed to show conclusively that the increasing educational attainment of the U.S. workforce had been responsible for a large part of the sustained increases in productivity per worker and, hence, in income and standard of living. Thus, subsidizing education seemed to be an unmixed good.

This paradigm argues that output per worker depends on capital per worker, including the human capital of education. But the law of diminishing returns applies also to human capital, or education, per worker. That is, as more is invested per worker, the additions to output that result from these investments begin to fall.

Proponents of the "economics-of-education" paradigm argued away the law of diminishing returns by suggesting that the increasing level of education would itself shift the production function upward, offsetting the expected decreasing returns.

Their theory ignores one basic point. The productivity of workers depends on their attitudes, their job satisfaction, and their actual situations compared with their expectations--in a word, morale. Morale suffers when expectations are frustrated and earnings are below those anticipated. This is indeed the case today.

Thus, it is no accident that the period of rapid investment in education (and rapid growth in enrollments) has been followed by the most sustained slowdown in productivity in U.S. history: Since the mid-1960's the average annual increase in real output per worker has been less than 1 percent. (Historically, this rate has been 2 or 3 percent.)

The mismatch data discussed earlier tie in nicely with surveys measuring morale and job satisfaction. Among the leading mismatched occupational groups were managers, 17 percent of whom were overtrained. The group includes nearly all supervisory personnel--the link between workers and top executives that is the most crucial element in industry. These managers are only a step above the actual workers but probably view their positions as management-entry jobs. As their aspirations become frustrated and their qualifications do not lead to promotion, serious morale problems are inevitable. And as go the managers and supervisors, so goes the organization.

Another argument for public investment in education has been the notion that everyone should have access to higher education. The open-admissions policies adopted by some colleges in the 1960's represent the extreme of this line of thinking. Existing grant and loan programs to students have also been defended on these grounds. Yet this is specious.

Most students benefiting from aid programs have been middle-class, not low-income, students. A system of federal scholarships for low-income students based on both need and academic achievement would be much less costly and would also be a more effective way to help needy scholars. The middle class should seek college only after a careful calculation of whether it is a good investment.

The use of the public sector to promote investment in college education has had exactly the opposite effect from what was intended. By increasing the supply of college graduates and encouraging them to expect rewards for their efforts, we have created a large group of overqualified, frustrated workers who will never be content with the jobs the system can provide.

The policy implication is to reduce subsidies and stop promoting higher education. When most students are fully paying their way, they will insist on full information about future rewards and make better decisions. And when colleges must charge the full cost of their programs, they will deliver a better product at a lower unit price. In short, the federal government should stop artificially lowering the cost of a college education.

This article is adapted from a longer essay published in Policy Review, the quarterly journal of The Heritage Foundation, a Washington-based public-policy research institute.

Vol. 03, Issue 05, Page 24

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