Does Education Pay?

There’s a lot of controversy about the value of college education as more indebted, degreed grads are stuck on their parents’ couches. With unemployment for new graduates lingering around 9 percent, many are questioning the value of higher education and whether it’s still the golden ticket to a good job.

Talent Management spoke with Richard Freeman, professor of economics at Harvard University and co-director of the Labor and Worklife Program at Harvard Law School, and Andrew Sum, director of the Center for Labor Market Studies at Northeastern University, on their contrary views about the value of a college education and what it means for talent managers.

How important is a college education in today’s working world?

Freeman: On average, college education is more important than it was in the past, but you can succeed greatly without one or without graduating with a college degree. This may seem paradoxical but it has an easy explanation.

The difference in the average earnings of all college graduates compared to non-graduates has gotten large, and graduates have much lower rates of unemployment than non-graduates in the current job market. But there is much greater variation around the average experience for graduates and for non-graduates; many persons who do not have a college degree earn more than those who do. If you do not go to college but get a job in a firm that promotes from within or get into a small business that is growing and that offers workers chances for ownership stakes, you can succeed famously. You will learn more from your job experience than most graduates learn in college. It is the learning experience and skill acquisition more than college education per se that today’s working world wants.

Sum: On average, college graduates will do considerably better than any young person who does not go to college after high school. The problem is the rewards for going to college have become fairly perverse over the past few years. There’s a lot more uncertainty attached to your ability to do well, although you could reduce that uncertainty by majoring in particular fields and doing particular things for yourself while you’re still in school. I still expect, on average, you will find a sizable differential that will prevail for the average college grad.

When labor markets are weak, employers will increase their demands for a job. When we were interviewing call centers a couple years ago and looking at who they were hiring, many were hiring kids with a college degree. Clearly the job doesn’t require anything like that. When we would speak to the employer and ask why he or she was hiring people with degrees, the response was, “Because I can.” This problem we have in the U.S. is even more intense in Europe. It’s not enough to just generate the supply of college graduates; you’ve got to guarantee there will be a demand there to absorb it.

Since we’re not generating many new jobs, new people trying to make it in the labor market are most adversely affected. You can try to influence demand — we’ve done this in the past with other programs — by giving employers tax credits for hiring college graduates. I say we have to say, “If you end up hiring an unemployed BA degree person, for the first year we’ll subsidize your wage up to this amount” — in the past it has been up to 30 or 40 percent. This gives an incentive for employers to put more people on their payroll. We subsidize energy, we subsidize R&D, we subsidize capital investment, but we don’t do much subsidization of workers’ wages. Large numbers of people are unable to get jobs in their field; we have to do the best we can to go out and make jobs for them.

What does this mean for HR leaders?

Freeman: HR should be looking for people who have some skills and want to learn more and have initiative in using skills. Now, there is no good app for linking huge databases of resumes or other data to winnow down large numbers of applicants to the right few, but some such apps will be coming. There is too much data and analytic techniques from computer science and physical science for HR and talent managers to go by seat of pants or gut. The sports teams — NBA, baseball and so on — have shown what one can do with data to better link skills to job roles. You cannot simply pick people on the basis of their majors or whether they have the “right” degree or not. The creative English major has a reasonably high chance to be better than the accounting major or engineering major on a real job. I would look for people with majors/minors or double majors and some devotion to extracurricular projects.

Sum: There are some instances where I could foresee spot shortages. If this happens, HR leaders will have to be involved in working with universities and on-the-job training to get all the help they need. If the labor market stays weak, talent managers will continue to have a lot of choices when it comes to hiring. It varies a lot by occupation and by area of the country. Either way, HR leaders need to work with universities to get young people acquainted with their firm. Give them work while they’re in school so they’ll retain loyalty when they graduate. There are certain skills you can learn on the job, that’s true, but for certain jobs upward mobility will be enhanced by going to school and improving your ability to acquire skills to move up. Even to be trained on the job, the more education you bring with you, the more likely a company will spend to train you.

The key issue is how to get a nation that wants to increase the college graduation rate to world highs to pursue policies that will give an economic incentive to employers and students to put these graduates to work and have colleges train them to be prepared for such positions.

Degree Holders and Unemployment
About 1.5 million, or 53.6 percent, of bachelor’s degree holders under age 25 last year were jobless or underemployed, the highest share in at least 11 years. In 2000, the share was at a low of 41 percent.

Out of the 1.5 million in the job market, about half were underemployed, an increase from the previous year.