Why Go to College?

Jeffrey Dorfman, of Forbes Magazine, Dispells the Myth of Underemployed College Graduates in this excellent article that takes an unconventional approach in media – explaining the benefit of a college degree. 

“The media love stories about unemployed and underemployed college graduates, often represented by the cliché of the college graduate working as a Starbucks barista. It is not unusual to find claims that thirty or forty percent of college graduates are underemployed (often defined as working in jobs that don’t require a college degree), with some unemployed on top of that. However, those statistics rely on a faulty definition of underemployment that greatly inflates the numbers reported.

The reality, thankfully, is much brighter for both college graduates and current and prospective college students. With a college degree, your average earnings are higher, and the probability of being unemployed or underemployed is pretty low.

We can break these claims into their two separate parts in order to debunk them. The first part, unemployment, is easy to establish. The Bureau of Labor Statistics reports unemployment rates by education level. As of the January 2017 report which contains numbers for December 2016, the unemployment rate for college graduates was only 2.5 percent. That means that only one out of every 40 college graduates is unemployed. This is half the unemployment rate of those with high school degrees and one-third the unemployment rate of those with without a high school degree.

This 2.5 percent unemployment rate for those with college degrees is close to what economists call the frictional unemployment rate (estimated to be between 2 and 2.5 percent). The frictional rate of unemployment is the part of unemployment due to people who are changing jobs. These people may have quit one job and are waiting to start another, or are just taking a few weeks to find a really good job. Frictional unemployment is considered normal, not a problem, since it is a natural part of allowing people to freely choose where and when they work. Because the unemployment rate for college graduates is essentially all frictional, that means it’s essentially as low as it’s possible to be.

Now, let’s talk about the reputed underemployment of college graduates. The New York Federal Reserve Bank in a recent report claims between 30 and 40 percent of college graduates are underemployed. That makes it sound like college is more of a gamble than an investment. However, the report’s numbers are skewed by a faulty assumption that has the effect of vastly overestimating the underemployment rate of college graduates.

The New York Fed’s report, by the three economists Jaison Abel, Richard Deitz, and Yaqin Su, defines college graduate underemployment to encompass all college graduates working in occupations deemed not to require a college degree. They further define occupations not requiring a college degree based on a survey of employers; if a majority of employers say a job does not need a college degree, all college graduates working in that occupation are counted as underemployed.

Such an assumption is faulty because different employers may have different requirements for the same occupation. While one restaurant might say no college degree is required to be its manager, another says the opposite and actually gives the manager enough responsibility and tasks to truly require (and fully employ) a college graduate. Yet, under the authors’ approach, if 49 percent of restaurant managers use a college degree and 51 percent don’t, all the ones with college degrees will be wrongly counted as underemployed.

Further, just because a job does not require a college degree does not mean that those working in that occupation who have a college degree don’t use it. When you combine the bias introduced by not believing employers who say they require college degrees for occupations for which a majority of employers do not with the number of college graduate who profitably use their degrees even in occupations that do not strictly require one, the number of college graduates who are underemployed is surely much less than is commonly claimed.

Further confirmation of the lower-than-believed underemployment rates for college graduates is provided by the average earnings of college graduates. We can use PayScale.com’s major-specific average earnings for early career people as a reasonable estimate of the earnings of recent college graduates. These salary averages are for people with bachelor’s degrees, but do not include anybody who also has a graduate degree. Yet, even for majors that would be suspected of harboring many of those claimed underemployed, these early career average salaries are quite healthy. For example, anthropology majors still average $39,900 and art history majors average $40,800 in early career salaries. Unless some employers are paying recent college graduates a lot of money, not that many of them can be severely underemployed if they still average about $40,000 per year for all recent graduates of that major.

While the cliché of Ivy League college graduates working at Starbucks making coffee makes a great story, it is actually pretty rare. Reported statistics on underemployed college graduates are based on a very biased classification of occupations in which college graduates are “underemployed.” Government unemployment statistics show that virtually every college graduate in the country has a job, with the tiny reported unemployment rate fully explained by people switching jobs. Stories of under- and unemployed college graduates may sell well, but they are mostly myths. File them under the heading of fake news.”

Source: Forbes