Building a Case Against The Education Bubble Position

There’s been a some talk about education bubbles as of late. Some of the evidence is compelling. A Frontline documentary on the quality and liability of for-profit post secondary education for instance. A general lamentation of the volume and cost of MBA’s being produced. And, many gripes about the affordability / accessibility of post secondary education in the US and Canada.

When demand exceeds supply, the price for that supply rises. There’s a period of lag between demand shocks and supply responses. Frequently, suppliers either overestimate demand shocks, or, more likely, increases in supply follow a step function, which in turn eventually causes a price collapse. It’s this dance between supply and demand that generates the pseudo-random price of a given product or service. It’s widely known that organizations make more money when they can discriminate on price, and, that organizations are likely to produce secondary competitive dimensions to do just that. This is generally accepted behavioral economics thought.

Table A-4, Employment Status of Civilian Population 25 years and older by educational attainment, is interesting. First,

Consider the third column, non-seasonally adjusted April 2011 figures. These are the absolute figures for the total number of those employed, participation rates, and the unemployment rate (those who are seeking a job but not finding one).

It tells the tale of four Americas.

The first one are high school dropouts. There are some 11.7 million of them in the US labor force. (Note, however, that that 11.7 million represents 46.1% of their total cohort. If you do the cross product, 11.7 million Americans out of 25.37 million Americans between 25 and 65 without a high school diploma are available in the labor force).

In effect, that unemployment rate of 14.5% is grossly underestimated of what’s really going on there. It’s bad.

The second section are high school graduates. There are some 37.5 million of them. Their participation rate is much higher, 60.4%. Their unemployment rate is 9.6%. These rates are close to Canada’s averages and participation rates during Chretien’s first term. In effect, not good, but better than the early nineties and what was felt during the eighties. Times are not good for that group.

The third section are those with some post-secondary education or an associate degree. In other words, community college graduates or 1 to 4 year university drop-outs. There are almost as many of them in the labor force as there are high school graduates. Their participation rate is much higher – 69.3%, with an unemployment rate of 7.2%. Their effective unemployment rate is still relatively high, but there is a lot of slack in that part of the labor market.

The four section are those with degrees or higher. There are nearly 47 million of them in the labor force. Their participation rate is much higher – 77%. Just over 1.9 million are unemployed, with a rate of 4.1%.

There are two types of unemployment – structural and frictional. Structural unemployment means that there is simply not enough demand for a set of, or lack of, skills in the market. As a result, people are available to work, but employers are not able to hire them. Frictional unemployment means that there are enough jobs for everybody with a given skillset (if not more!), but there are lag times involved. For instance, from the point that a job posting goes up, to when that person is hired, represents a gap of at the very, very, very least, 2 weeks. Considering that people do cycle from job to job, and labor mobility (movement from city to city to supply labor to a growing specialized field) causes friction, it’s not surprising that an unemployment rate of around 3.5% might constitute full employment for a given cohort.

An anecdotal argument follows. That there are a whole bunch of those with degrees that are tethered to a labor market because of their mortgages. If you’re an aerospace engineer in Florida, recently laid off from NASA, there are probably jobs for you in regions with high densities of aerospace industries. Washington State comes to mind instantly. The province of Quebec. Toulouse in France. And maybe something neat is going on in the private sector in New Mexico or Arizona. However, selling your house is a pretty big barrier. It introduces a degree of frictional unemployment I’m not so fond of. An unemployment rate of 4.1% among a cohort weighed down by depressed housing prices sounds pretty close to full employment – especially coupled with a very, very high 77% participation rate (participation rates among 25-44 tend to be around 90% in general. Among those 44 and up around 60%. That’s just a heuristic though.).

We’re talking about a tale of four economies here. If you have no skills, in a curved world, you’re competing against those in other countries with no skills. Globalization has exported those jobs away, along with the inflation they might have generated by way of collective bargaining. Those with a high school diploma do many jobs that are intensely local and so far, very resistant to productivity gains. These include gas attendants, cashiers, clerks, QSR, line cooking, cleaning, and certain low-level agricultural positions. They are most vulnerable to price-of-land shocks and the whims of the macro-local. Because productivity cannot increase, their relative salaries will remain tethered to local market conditions that are not of their own making.

Those with trade school or service school – like dental hygienists, plumbers, construction workers, electricians, welders, hair stylists, and certain types of designers – are resistant to most forms of globalization. They serve all four sectors of the economy, but are productivity curve resistant. Welding has been welding has been welding for many decades. Same thing with cutting hair. Better scissors won’t enable a single stylist to increase heads cut per day that dramatically.

Those with post-secondary degrees are as exposed to the global economy as those without high school education. Except that they are empowered to compete globally. Somebody without an education is less equipped to take advantage of the instruments of globalization. It’s with this educated sector that a lot of competitiveness is going to depend on. And clearly, there’s a lot of demand for them.

I’ve left out manufacturing – something that is arguably education independent. I’ve done so deliberately.

Agriculture used to employ the vast majority of people in Canada and the United States. Productivity gains reduced the number of bodies needed to produce a unit of food all the way down. This march generated poverty – so much so that troops returning home from two world wars had to be nearly bribed by their governments to take up farming. And many of the smart farmers simply bought tiny plots very close to major cities and took the trolley into the city to work. All of that talent got transferred into factories. Arguing from the farm, in 1911, that the rise of manufacturing is a bubble, is certainly one line of argument. One that would take several decades to actually unfold.

Productivity gains in factories, owing largely to electrification and really strong managers who had combat experience, caused rising wages between 1947 and 1960. And then the vanquished countries became competitive and I suppose productivity gains were no longer sustainable. When I watch documentaries of Chinese factories, I see a few gains in terms of productivity and control, I rapidly understand why such scales are impossible in a small country like Canada. The possibilities are remote that Americans could make the productivity gains necessary to overcome the Chinese competitive advantage in the manufacture of blenders, toasters, and light commercial goods. In effect, if you accept the hypothesis that productivity results in both increased wealth and higher unemployment in a given sector, then you’re probably okay with the notion of a disappearing low-tech manufacturing sector. That talent will be soaked up by a new sector, emerging sector.

High-tech manufacturing is one example. The skills required to keep a processed food chain going is incredibly complex because biology is involved. As far as the sciences go, the physics involved in building a blender have been well known and routinized for decades. Nasty things happen all the time in the food supply in both Canada and the United States – even with experienced managers and technology. That’s right – I consider the manufacturing of food to be high tech.

Another sector is in the fabrication of big transit infrastructure. A sector that North American society has fallen behind badly. Germany trades high speed trains for blenders. They’ve made their choices, and it’s working for them.

This leaves the quaternary sector, and its a big reason why the old powers are so serious about copyright protection and intellectual property rights. Arguing that there is an education bubble in the trades in 1911 is akin to arguing that there’ an education bubble in the technologies in 2011. It took 60 years before the bubble in manufacturing eventually burst into a spectacular staflationary period. Most bubbles I know of took anywhere between 2 and 10 years to fully develop and burst (South Sea, Tulip, Louisiana, Nikkei, US housing). Can manufacturing even be seen as a bubble?

What is of great concern is the hazard being borne by those who seek access to post secondary education. Government supply has not kept up in the United States. The private sector enters, and offers price discrimination to those who did not have the grades to make it in. Those students buy debt from the government, and transfer that wealth to the private sector. The question to ask, from a public policy perspective, is if the private sector is producing individuals who are capable of competing in the global economy. If the answer is no, we are only creating a wasted generation. If the answer is yes, then we have a good thing. Traditionally, there would be some semblance of standards. My experience thus far is that the quality of candidate produced by these private institutions are roughly on par with a state university in India. That is to say – little practical hands on application and an environment rife with cheating and lax standards. Not good.

Discouraging those with the drive and capability to earn a post-secondary education is irresponsible. We will need the very best of us to compete globally over the next eighty years in particular. The recent development of turning over marginal-skills education to the private sector, secured with public sector debt, is a troubling concern. I would like to believe that the demand curve for such institutions will respond relative to the ability of employers to absorb that talent. Devil take the consequences.

There’s evidence that the demand for high skills labor remains strong, in spite of a struggling domestic economy. Since demand appears to be in most cases tethered to actual markets, producing real goods, with good productivity growth – there might not be a bubble in most sectors of education. Though, the economies ability to absorb marginal MBA’s and technical degrees may be coming to an end.

This has been a long jog. What do you think? Can the quaternary sector produce enough to balance out the trade, or are we about to go retrograde?