Saturday, October 20, 2012

Two problems with post-secondary education in the U.S.

Two fairly obvious problems with college education in America are the following:
  1. Tuition rates rising much faster than inflation
  2. Many jobs require technically unnecessary 4-year college degrees from applicants. (e.g. data entry, administrative assistance, skilled or unskilled labor, etc)
Most people recognize these two problems exist, and I would like to diagnose some of the causes. I propose that each of these problems is due to a feedback loop that naturally develops due to market forces. In simplified version, they are as follows:
Problem 1: Tuition Hikes

Problem 2: Jobs Require Unnecessary Education

Problem #1: 
On day one of economics class, one learns about the relationship between supply and demand in market economics. Let's look at the demand curve for college education:

Like any commodity, as the price of tuition increases (from "a" to "b"), the quantity of demand for college education is reduced.

On the supply side, as the price of tuition increases (from "a" to "b"), colleges are willing to devote resources to increase their capacity and enroll more students.

These two lines intersect at the natural equilibrium point where colleges will naturally set their prices.

Any external forces that modify the demand for college education will shift the demand curve, resulting in a new equilibrium point, with new tuition and total student capacity in the market. What might happen if the government makes it easier for students to pay for college? (Grants, low interest loans, etc). At a given tuition rate, the number of students who seek education will now increase, as shown by a shift of the line to the right. As you can see, the natural reaction for the universities will be to both increase tuition rates and increase student capacity.

But what happens if it is difficult or undesirable for schools to increase enrollment (either because it requires capital expenditure and construction, or because the wish to maintain a selective image and limited student body)? This is what we call "inelastic supply", and is shown below by a vertical supply curve.

As you can see, the schools do not absorb the increased demand by increasing enrollment. Instead all of that extra demand result solely in increased tuition rates.

Supply-Demand economics explain relationships A and B in the first feedback flowchart above. For more on this, read more on the Bennet Hypothesis. Relationship C can be expected due to legislators' continued efforts to combat tuition hikes.

Problem #2
If high school students become aware that more and more jobs require 4-year college degrees, it will increase the demand for college education. (Relationship A in the feedback flowchart for Problem 2). This will result in more students graduating and entering the job market (Relationship B). This in turn increases the incentive for companies to include unnecessary education requirements for application. With more applicants than positions, a company can afford to impose an arbitrary filter on its candidate pool such as “Those without a 4-year degree need not apply,” even when the education is unnecessary and they don't care in which field the degree was received. Although it may cause them to lose out on some exceptional candidates that happen not to have a 4-year degree, it will likely increase the overall quality of their applications.

This effect can explain relationship C in the second problem.

The Combination
When we put these two feedback loops together, we see that they actually build off of one another:
The Solution?
Both of these situations are affected by a myriad of external forces. There isn't an easy way to solve these problems, and part of the purpose of this post is to solicit input from my readers.

I think it is important that low income students be offered opportunities to receive post-secondary education, so I don't support elimination of federal aid. One thing that would throw a wrench in vicious cycle #1 would be to eliminate private universities and have government controlled tuition rates, but this goes against many of my core beliefs about capitalism and the free market. Is there a way to improve the supply elasticity so universities naturally absorb the increased demand with capacity increases instead of tuition increases?

As for problem #2, I think it is wasteful for kids to be taking out tens of thousands of dollars in loans to pay for meaningless degrees simply because many job applications require one. However, this cycle naturally dissipates when the economy improves and the number of job applicants no longer outnumbers the number of positions. In the meantime however, is there anything else we can do other than encourage high school students to pursue trade schools when it fits them?

One potentially contentious idea that could solve both problems would be to modify federal aide for college so that it is not evenly distributed between types of degrees. A student of a given income could receive more aid for pursing an STEM degrees (science, technology, engineering, mathematics) than arts degrees.

 What do you all think?