Purchasing Power Remains Flat

As recent college graduates take to the street, searching for the first jobs of their careers that will grant them more purchasing power than non-graduates, they can rest assured that college was worth it. Or at least, that’s the conclusion David Leonhardt of The New York Times reached — that college is clearly worth it.

Mr. Leonhardt points out that college grads made 98% more an hour on average than people without a degree in 2013, which is up from 89% in 2008 and 64% in the early ’80s.

This trend is supposed to be evidence that there’s a lack of college grads. If there were too many, the pay gap would be shrinking, not rising. Thus, the economy is suffering.

Something about this doesn’t square with the reality of flat incomes in the U.S.

The numbers are based on averages, and there are big differences in experiences among individuals within groups of both graduates and non-graduates.

That said, it is true that the pay gap between the college educated and everyone else is getting bigger. It’s also true that the unemployment rate for college graduates is exceptionally low. Even in the younger set of college grads, those between ages 25 and 34, the unemployment rate is around 3%.

Still, if there was a shortage of something, I’d expect the price of that item to rise, not remain flat. And therein lies the problem.

Purchasing Power: Education vs. Employer

College grads are not making headway; instead, non-graduates are losing ground. The income paid to college grads, on average, has remained flat, but the wages of non-graduates have fallen.

To look at it a different way, college graduates are now taking jobs away from non-graduates. This reality is reflected in several recent studies and in U.S. Bureau of Labor Statistics data.

According to The Center for College Affordability and Productivity, in 2008, roughly 38% of working college graduates were in positions that didn’t require a degree. By 2013, that number had increased to 48%.

Not every Starbucks barista is a college graduate, but many of them are. So what happens to the non-graduates who didn’t get that job? It’s unlikely that they are moving up in the world, skipping over college graduates to take higher-paying positions. It’s more likely that they took an even lower paying job, if they could find a job at all.

It’s hard to blame employers for this. If an open position doesn’t require a college degree, but 50 out of 200 applicants have a degree, how much more likely are you to choose a grad?

There’s no question that finishing college requires persistence and hard work. So even though a job doesn’t require it, if the choice comes down to a pool of several equally qualified candidates, some with degrees and some without, it’s easy to see why a college grad would end up with the job.

On the other side of the fence, this means that going to college is becoming just as much a defensive strategy as it is an offensive one. Young adults could view earning a degree as a means to a job — any job — rather than as a proactive measure that moves them into a field of study they want to pursue.

This is not a good situation. Under this scenario, too many college grads will take jobs for which a degree is unnecessary, and many who didn’t go to college will be left with even fewer prospects.

A further bad outcome of this trend is an affirmation to colleges that what they’re providing — in terms of services for fees — is justified. This will slow down any efforts to reform higher education by trimming costs and will keep student loan debt levels high. (Harry Dent further explains this issue of purchasing power and student loan debt.)

The way out of this trick bag starts with employers. They should be asked to hire qualified applicants instead of super-qualified applicants. However, that would leave many college graduates with no job at all.

At the end of the day, this becomes a conversation about who will take the hit as our national economy deals with a long period of slack demand while we work our way through the economic winter season.

For now and the foreseeable future, it appears that the burden will fall on the least educated, which means that Mr. Leonhardt’s analysis is only partly correct.

Although we aren’t dealing with a shortage of college grads, getting the degree is definitely worth it, because no one wants to be the guy not chosen for the job.

Rodney

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.