U.S. Economy

College Towns Have Had Their Fun

Millennials will age out, and then what?

Millennials will age out, and then what?

Photographer: Rich Sugg/Kansas City Star/MCT via Getty Images

As economists look for models that could reverse the fortunes of stagnating parts of the country, one cause for optimism has been college towns, which have thrived despite being neither wealthy coastal metropolises nor booming Sun Belt cities. The problem is that the common thread among those towns is … colleges. And demographic and labor-market forces have peaked in higher education.

The appeal of the college town model is understandable. As a recent Wall Street Journal article notes, since 2000, the median unemployment rate in counties with flagship land-grant universities has been 1.2 percent lower than in other counties. For communities that aren't blessed with the robust infrastructure and deep talent pools of large cities, higher ed institutions represent a robust source of economic demand that isn't dependent on manufacturing or the business cycle. It's also a way to ensure a steady stream of young people, fighting some of the demographic pressures as the rest of small-town America ages.

Well, not quite "ensure." That steady stream of young people is already tapering off. The total number of U.S. high school graduates peaked in 2013. All of the excitement in the business and political world about the growing impact of millennials because of the size of the generation has a flipside -- the following generation is not hugely larger. The number of high school graduates is expected to stagnate for years.

And the distribution of high school graduates is anything but equal. There are dwindling numbers of high school graduates in the Midwest and the Northeast. The South and West will continue to grow.

This compositional change will create winners and losers. The Wall Street Journal piece noted the success of Auburn University in Alabama, but Auburn has a lot of assets that most colleges don't. It has a successful college football program that recently won a national championship in the high-profile Southeastern Conference. As neighbor states Florida and Georgia have booming high school populations and increasingly competitive state universities, Auburn can recruit some of the overflow. Smaller, less prestigious colleges in the Midwest and the Northeast will struggle.

The other factor working against colleges is the increasingly strong labor market. The Minneapolis Fed recently noted that given the low unemployment rates in its district, employers are increasingly reaching out to nontraditional labor pools to fill open positions. Senior citizens, parents with young children and convicted felons are all being considered for jobs that might not have come their way in weaker job markets. In such an environment, employers may try to convince high school graduates to come work for them rather than going to college.

One of the hopes for the economy heading into 2017 is that a stronger labor market and rising wage growth will draw more people into the workforce. This would allow for continued above-trend economic growth without an unwelcome surge in inflation. And indeed, the labor-force-participation rate for people ages 20 to 24 remains around 4 percent below its pre-recession level. But a higher participation rate for young people most likely means fewer people in college.

Young People at Work

Civilian labor force participation for ages 20 to 24

Source: U.S. Bureau of Labor Statistics

A plateau in the number of high school graduates, and a greater percentage entering the workforce without college, would mean declining enrollment and revenue for many institutions, especially in the Midwest and the Northeast. What can they do? They can try increasing international enrollment. That may be difficult if the Trump administration raises obstacles to student visas or causes prospective international students to choose not to study in the U.S. They can try to expand their geographical recruiting territory, but that's a zero-sum game. Or they could begin the painful process of cost-cutting. This would force a culture change on institutions that have been used to perpetually raising prices and spending.

A final risk is the possible impact of technology. Universities like Harvard and Stanford will always draw elite young students from around the world interested in the elite experience and networks offered at prestigious schools. College sports and the campus pride they create may similarly lock in students at flagship state universities. But an online degree from name-brand schools, if available, could take market share away from less prestigious schools, deepening their budget crisis.

In all likelihood, some institutions will close their doors. Many more will stagnate or shrink. This will hit local economies that revolve around the institutions. Lost jobs for faculty and service workers alike. Fewer students to rent apartments and spend money in local towns. Empty buildings for which there's no obvious new purpose. Not quite a new Rust Belt -- because it would be pockets of rust all over the country.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Conor Sen at csen9@bloomberg.net

    To contact the editor responsible for this story:
    Philip Gray at philipgray@bloomberg.net

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