Monday, June 25, 2012

Simple Theory on the College Premium

I'm sure a Yale economist could formalize this with set theory, but the idea is pretty straightforward. This is from Steve Postrel:

My hypothesis is that it is precisely the dumbing down of U.S. education over the last decades that explains the increase in willingness to pay for education. The mechanism is diminishing marginal returns to education.

 Typical graduate business school education has indeed become less rigorous over time, as has typical college education. But typical high school education has declined in quality just as much. As a result, the human capital difference between a college and high-school graduate has increased, because the first increments of education are more valuable on the job market than the later ones. It used to be that everybody could read and understand something like Orwell’s Animal Farm, but the typical college graduates could also understand Milton or Spencer. Now, nobody grasps Milton but only the college grads can process Animal Farm, and for employers the See Spot Run–>Animal Farm jump is more valuable than the Animal Farm–>Milton jump.

 So the value of a college education has increased even as its rigor has declined, because willingness to pay for quality is really willingness to pay for incremental quality.

I have a feeling that with the increased importance of programming, and the fact that programming skill is verifiable, smart kids will start arbing the skills premium, taking the $150k otherwise spent on college to start a business or buy a condo, and avoid those $50k/year schools that offer little.


Jason Ruspini said...

I don't disagree with your conclusion, but this sounds like an academic in denial of a simpler explanation: tuition prices belong to the pre-2007 world, and, aside from top-tier and engineering/science programs, they will be headed lower with time. It is more a question of why these prices are so sticky, and with most programs this has more to do with the loan system and parents simply being taken advantage of (remember Kafka's gatekeeper: "I am taking this only so that you do not think you have failed to do anything.”) and less with employer preferences.

Parents and prospective students actually have the organizational tools to begin pushing tuitions lower, but the most vulnerable, low-value, "negative ROI" colleges and programs are also the ones that accept presumably the least organized and well-thought-out students.

Mercury said...

Actually JR , just as was recently the case with real estate, the popping of the college bubble will make obvious to all interested parties that not all college degrees are created equal. Repricing will take care of itself...unless, -again as with real estate- the government stands athwart markets yelling: Stop! and prevents them from properly clearing.

It may also become more common for employers to include achievement tests (either standardized or their own in-house) as part of the job application process.

But I think organized student/parent demand will be for the revival and expansion of high-school level vocational training.

ed said...

I don't believe the premise that HS has gotten less rigorous, at least not for the top 25% of students who actually graduate from college. Quite the contrary.

In 1980 the schools closest to the University of California in Riverside didn't even offer calculus in HS (or Algebra in middle school). Then we moved to Texas, and the school there (which was 5A, the largest class of schools) only offered 2 AP classes (one of which was AB calculus). The smaller surrounding schools had no AP classes at all.

My nieces and nephews going to HS now have MUCH better programs, and I think that's typical for middle-class areas today.

cig said...

The theory sounds far fetched.

What about a simple supply side take: absent productivity improvements, the cost to provide an education increases by the ever increasing amount it takes to keep educators from switching to ever (relatively) more productive competing activities. Same mechanism that makes a haircut cost more as a proportion of the median wage now than in 1950.

Combine that with a pretty flat demand curve, which means that supply constraints dominate the clearing price, and you have an explanation.

The obvious solution is to increase productivity by replacing human educators with software where they are least useful. This may take a little while to set up and catch on in a pretty conservative industry.