A tight labor market shows the true value of education – and we’re seeing now that college has been overpriced. For many workers, it’s not worth the time or the money.
In the depths of recession employers added years of experience and additional degrees into hiring requirements – "the barista with a master's degree" – not necessarily because that experience or education was important to do the job, but just because employers had the luxury of being more picky. As the labor market has improved, those requirements have been loosened, presumably without much impact to productivity.
This reality is at odds with the conventional wisdom for the rise in American economic inequality over the past few decades, which says that technology, globalization and education have segmented society into winners and losers depending upon whether someone is a manufacturing worker in the Midwest or a knowledge worker in a coastal city. That conventional wisdom argues that rising inequality has been for structural rather than cyclical reasons.
But as the past few years have shown, we're in an environment where employers are relaxing education requirements and those with the lowest wages (and presumably the least education) are getting the biggest raises. So maybe something has changed and now the link between education and inequality isn't as robust as it used to be, or maybe the theory wasn't right to begin with.
When unemployment was higher, it was plausible to think that more workers needed more education to earn more and to make the economy more productive. But years of very low unemployment have shown a different path, as millions of workers get that higher pay without having to spend years and tens of thousands of dollars on degrees that employers only "require" when they have leverage over workers.
This would be significant because education is one of the big four budget items – along with housing, health care and transportation – that are burdens for workers to pay for, and that policymakers have had difficulty addressing. To the extent the US could spend less on education, we could free up resources to tackle something else.
This isn't to belittle the value of higher education; a tight labor market won't reduce the need for degrees for engineers or lawyers. But as in other areas related to labor markets, maybe we've miscalculated how much is appropriate. Just as the Federal Reserve overestimated the level of the unemployment rate at which inflation becomes a concern, and deficit hawks have underestimated the level of the federal budget that's manageable without leading to higher inflation and interest rates, America may have overestimated how educated its workforce needs to be in order to thrive in a modern economy.
As with the Fed and the budget deficit, the conclusion might be the same: The only way we're going to get better answers to these questions is to run the labor market hotter to find out. “Many workers need more education” is no longer looking like the best theory.