Is the market for college graduates headed for a bust? Demand and supply responses to rising college wage premiums - includes related articles - Special Issue: Earnings Inequality

New England Economic Review, May-June, 1996 by John H. Bishop

Demand for college-graduate workers was strong during the 1980s (Blackburn, Bloom, and Freeman 1989; Katz and Murphy 1990; Kosters 1989; Freeman 1991). Their relative wage rose, and the share of 18- to 24-year-olds attending college rose in response. Have the demand and technology shocks that produced this result now run their course? Is the supply response large enough to stop or reverse the 1980s escalation of the relative wages of college graduates?

Read superficially, U.S. Bureau of Labor Statistics (BLS) projections appear to suggest that the answer to these questions is "Yes." In the most recent BLS report, the growing supply of college graduates was projected to outstrip growth in demand by 330,000 annually (Shelley 1994). An even larger gap between supply and demand had been projected in 1992 (Shelley 1992). Looking at earlier projections, some in the press even reported that the college graduate labor market was about to go bust. New York Times reporter Louis Uchitelle, for example, led off an article titled "Surplus of College Graduates Dims Job Outlook for Others" with the following:

Hundreds of thousands of jobs, once performed creditably without a college degree, are today going to college graduates as employers take advantage of an oversupply.... At roughly 25 percent of the work force - higher than in any other industrial nation - college graduates outstrip the demand for their skills, the Labor Department reports (June 18, 1990, p. 1).

Most economists, however, do not believe a surplus of college graduates and other skilled workers exists now or is likely to develop anytime soon. The Secretary of Labor and the Chief Economist's office within the U.S. Department of Labor apparently give little credence to the BLS projections of a college graduate surplus. Skills shortages are a common theme of Secretary Robert Reich's speeches and of policy initiatives of the department.

Who is right? Is a bust of the college graduate labor market on the horizon? In fact, a closer reading of the latest BLS projections suggests that it is not. The future is predicted to be much like the past. Since the recent past has been characterized by low unemployment and rising relative wages for college graduates, the BLS data can also be interpreted as predicting more of the same.

Past BLS projections have not been particularly successful in predicting changes in the market for college graduates. The BLS projected a strong market for college graduates in 1970, just prior to the bust of the 1970s. The BLS projected a weak market in 1980, just prior to the 1980s boom. Moreover, the task of projecting the number of jobs "requiring a college degree" into the future is essentially impossible. The methods used to make the projections are not well adapted to the task. BLS projections published in 1981, 1983, and 1985 underestimated the growth of managerial and professional jobs and overestimated the growth of lower-skill jobs. The methods used to project occupational employment inevitably miss an important portion of the rise in skills that is under way in our economy.

An alternate methodology for projecting occupational employment is available. Regressions predicting occupational employment shares with a trend, unemployment, the trade deficit, and the share of workers using personal computers did a better job projecting the early 1990s than the BLS. Both methods, however, missed predicting the slowdowns in the growth of clerical, technical, and craft jobs.

The updated model projects that professional, technical, and managerial jobs will account for 60 percent of job growth between 1990 and 2005. Skill differentials between college-level jobs and other jobs continue to expand, even in the most recent data. And because the college-age population cohort is small, the increase in the share of the cohort attending school has not produced a substantial increase in the ratio of new BAs to total employment. Rates of college completion are not high enough to flood the college graduate market, and U.S. youth are not overeducated relative to those of other nations, as has been claimed. In fact, young Europeans and East Asians spend more years in school than young Americans.

These findings have important policy implications. They suggest that we should raise high school standards, increase student financial aid, make tuition tax-deductible, and stop increasing tuition at public colleges.

What Do the 1994 BLS Projections of Supply and Demand for Graduates Really Imply?

Let us begin by examining the projections of supply and demand made by the U.S. Bureau of Labor Statistics in 1992 and 1994. The 1992 report states that "estimates of available entrants to the college graduate labor force (supply) will average ... 406,000 more than demand" (Shelley 1992, p. 16). The 1994 report predicts that "nearly 25 percent of new entrants are expected to settle for jobs that do not require a college degree" (Shelley 1994, p. 9). Both sound quite negative about the future demand for college graduates. Table 1 presents the numbers. In 1992, BLS projected a significant deterioration of the supply-demand balance during the 1990s. The annual increase in the number of "underemployed" graduates was projected to be equal to 31 percent of the annual flow of BAs into the labor force (both immigrants and new graduates) during the period. The share of underemployed college graduates was projected to increase from 19.9 percent in 1990 to 25.9 percent in 2000.