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Higher Education: An Employer-Driven Bubble

Maximillian Wang
Mounds View Senior High School
Arden Hills, Minnesota

In a time of financial uncertainty, higher education offers the promise of a stable future. As we have seen in the past decade with the housing crisis and dotcom bubble, though, such economic certainties are often too good to be true. Higher education has become overvalued in the American job market due to unjustifiable increases in business demands for college graduates. While some may have a potential need for a higher education, many more are only being tricked into its illusion of job security.

In much the same way that housing prices seemed like they would go up forever in the early 2000s, higher education has become an economic bubble, priced higher than its intrinsic value. To see why, we need to explore the role that higher education plays in the labor market. According to Prof. Michael Spence’s paper, “Job Market Signaling,” which earned Spence the Nobel Prize Award in 2001, higher education serves primarily to signal, indicate, a student’s potential productivity to employers.1 Looked at from a different perspective, higher education is a way for employers to estimate the productivity of the college graduates they are hiring.

Spence’s signaling model describes the labor market as a continuous cycle: employers decide the wage schedule (like a demand schedule), which individuals use to decide on their signaling method (to go to college or not) based on signaling costs, and then businesses use these signals to hire employees. In a system in equilibrium, the productivity of the workers that the business hires matches the productivity that they expected when forming their wage schedules; as Spence termed it, the system is “self-confirming.”1

There are two important points to note about Spence’s theoretical model, which we will take into account when this model is applied to the real world. First, it is hard for companies to judge the productivity of new employees, as “productivity” is often hard to measure. For example, how would you measure the productivity of a lawyer? As a result, it is a challenge for companies to decide if their wage schedules are actually self-confirming. Second, Spence asserts in his paper that, largely for simplicity, “education does not contribute to productivity”. We would hope, though, that higher education does contribute to increased productivity among students by teaching them new skills. In other words, an investment in higher education should “produce” human capital that will lead to increased productivity.

The problem with today’s higher education system is that students are not becoming as well educated as their predecessors. In part, this is because the prestige of universities is determined largely by quality of research, thus, many colleges have put research as the primary priority, not teaching. The result is that 70% of college teachers fall under the category of “contingents,” a term used to describe part-time teachers or lecturers at universities. That’s up from only 43% in 1975.2 Students’ discipline in college has also fallen. As a time-analysis survey by University of California, Santa Barbara, found, college students spend, on average, 14 hours a week studying, down from 24 hours a week in 1961,3 and which is far lower than amount of study time professors expect.4 More shockingly, this drop in studying has been widespread. “It’s not just limited to bad schools. We’re seeing it at liberal arts colleges, doctoral research colleges, masters colleges. Every different type,” said Philip Babcock, one of the authors of the study.5What could one expect as the result of lower teaching quality and less time spent by students on studying?

Many would still argue that American universities are educating students well, pointing to a number of international rankings that consistently place American universities at the top.6, 7, 8 The problem with these rankings is that they take overweight research contributions and underweight quality of teaching. For example, the Academic Ranking of World Universities (ARWU) by the Center for World-Class Universities, considered one of the best recognized rankings of universities across the world,9 and which, in its 2011 ranking, placed eight American universities among the top ten in the world,8 uses “six objective indicators to rank world universities” that includes “number of alumni and staff winning Nobel Prizes and Fields Medals, number of highly cited researchers selected by Thomson Scientific”9 but nothing about quality of teaching or student learning. While a university with many professors with such awards would have a commendable research program, this doesn’t necessarily translate into good undergraduate teaching.

The declining quality of American higher education causes an economic bubble by influencing two parties, the students and the employers. College graduates entering the workforce are not as productive as their predecessors, because the quality of education has gone down. Employers, who, as we said above, find it difficult to judge the productivity of their workers themselves, use international rankings and other such inflated reports to evaluate the potential productivity of workers, viewing new students as better than they actually are. Thus, employers adjust their wage schedules for college graduates upwards, and students comply by increasing their demand for higher education, but employers only perceive this system as self- confirming, while in truth the system is in an economic bubble.

Unwarranted demand for college graduates is at the heart of America’s problems in higher education. As long as employers offer overvalued wages to college graduates, more and more people will want degrees, as reflected in the growing cost for a higher education. Higher education simply does not give a profitable return for its hefty investment. So, high school students looking to the future should beware of the dangers of a “safe” investment in college, because safety can hold so much false promise.

Works Cited

1 Spence, Michael. “Job Market Signaling.” Quarterly Journal of Economics 87.3 (1973): 355-74. Oxford Journals. Web. 2012.

2 Hacker, Andrew, and Claudia Dreifus. Higher Education?: How Colleges Are Wasting Our Money and Failing Our Kids—and What We Can Do about It. New York: Times, 2010. Print.

3 “College Students Don’t Study as Much as They Should.” Good Magazine, 18 Nov. 2011. Web. 12 Mar. 2012.

4 Babcock, Philip, and Mindy Mark. “Leisure College, USA: The Decline in Student Study Time.” Economic Inquiry (2010). Print.

5 O’Brien, Keith. “What Happened to Studying?” Boston Globe, 4 July 2010. Web. 12 Mar. 2012.

6 “QS World University Rankings 2011/12.” Quacquarelli Symonds Ltd, 2012. Web. 12 Mar. 2012.

7 “World’s Best Universities: Top 400.” US News. U.S.News & World Report, 2012. Web. 23 Mar. 2012.

8 “Academic Ranking of World Universities - 2011.” Shanghai Ranking Consultancy, 2011. Web. 12 Mar. 2012.

9 “About ARWU.” Center for World Class Universities, 2011. Web. 15 Mar. 2012.