The Sheepskin Paradox

College grads in lower-level jobs

In recent years, a seeming paradox has bedeviled discussions regarding the labor-market prospects of college graduates: On the one hand, a number of researchers have found that many grads are winding up in jobs previously held by those with a high school diploma--a worrisome prospect to students and their parents who have borrowed heavily and shelled out hard-earned dollars to secure the vaunted economic benefits of a college degree. Indeed, according to one Labor Dept. projection, the growing supply of college grads could outstrip growth in demand by as much as 330,000 annually by 2005.

On the other hand, the wage gap between high school and college grads continues to widen and has recently been running as high as 60% to 70%. While a major reason for this has been a decline in the real wages of less educated workers, the real wages of college graduates have also posted modest growth.

The problem with these two trends is that they seem inconsistent from an economic perspective. If college grads have been flooding the job market, boosting supply relative to demand, why haven't their wages been falling? That's the question addressed by Frederic L. Pryor of Swarthmore College and David Schaffer of Haverford College in a study in the latest issue of the Monthly Labor Review and in a forthcoming book Who's Not Working And Why.

To find the answer, the two economists analyzed data from several surveys, including a 1992 canvas of some 20,000 U.S. adults that focused on cognitive skills. They found that it was not just possession of a college degree that determined a graduate's employment or salary, but his or her functional literacy. "Many college graduates," says Pryor, "simply lack the reading, writing, and mathematical skills to solve problems that are supposed to go with a college education."

Those with such skills, the researchers found, are indeed in short supply and continue to find high-paying jobs. Since the early 1970s, in fact, the average real wages of this group have risen by a healthy 20% to 25%.

At the same time, however, the complaint about downward mobility rings true. Since the early 1970s, a rising share of university-educated workers have wound up with high school level jobs (although recently this trend has been leveling off) and have faced stagnant or declining real wages. But this group on average turns out to have considerably lower "functional literacy" than other university graduates.

In sum, it is the skills college grads bring to the labor market, not their sheepskins, that determine their economic fate. "The shortage of qualified college graduates is real," says Pryor, "but the key word is `qualified."'

Before it's here, it's on the Bloomberg Terminal.