BUSINESSWEEK ONLINE : MAY 31, 1999 ISSUE
SOCIAL ISSUES

Commentary: What Can K.O. Inequality? College


Bachchi Nguyen, 20, probably wouldn't make it through college without grants and loans. It's not that she's a slacker. The University of California at Riverside junior juggles an 18-unit course load in business administration and works 15 hours a week as a bank teller. Nguyen's parents, who immigrated from Vietnam in 1992, can't help with the $13,000-a-year tuition. Her father, a construction worker, and her mother have 10 children, two still at home. ''The grants and loans take some pressure off my shoulders,'' says Nguyen, who has gotten $3,000 a year in federal Pell grants plus $10,000 in loans so far.

Many more students soon will be joining Nguyen at the loan window. Over the next 15 years, the prime college-going age group will swell by nearly 25%, as the baby boomers' children--dubbed Generation Y--turn 18. Education experts call it Tidal Wave II: a flood of new students on a scale the U.S. hasn't seen since the boomers kicked off a burst of campus-building three decades ago. By 2015, today's campus population of nearly 15 million could soar as high as 22 million students. By contrast, just 2.4 million students--mostly the so-called baby busters--were added to the rolls over the past 15 years.

But the new crop of students will differ markedly from their parents. Instead of coming largely from middle-class families, two-thirds of the increase in Generation Y-ers will be among students like Nguyen, the children of minority, immigrant, and poorer families who make up a larger share of the population today--and who often need extra aid to get through college. ''There's a train wreck coming unless we find ways to help,'' says William Pickens, executive director of the California Citizens Commission on Higher Education. His group, mostly business leaders, was formed to help California cope with the change, which is expected to hit hardest in the fast-growing and racially diverse state.

How the U.S. handles this torrent of young people has vast implications for its global competitiveness and for deep-seated social problems, such as persistent income inequality. Certainly, plenty of students have flocked to college campuses in the past 15 years, as computers and other high-tech innovations sparked an explosion in employers' need for higher-skilled workers. But new research shows that the growth of skilled workers has actually slowed in the 1990s compared with prior decades. The reasons are largely demographic. Today's college-age generation, the baby busters, has just 17 million people, squeezed in between 72 million boomers and 60 million Gen Y-ers born from 1979 to 1994.

In fact, the percentage of the total labor force that has attended college barely budged in the 1990s. And while the ranks of students continue to rise in absolute terms, they have been falling as a share of the population. This has caused national spending on higher ed to lag, too (charts). The share of gross domestic product devoted to higher education has been flat for nearly two decades and actually has slumped since 1992, the first time this has happened in a non-recession period since the 1940s. The result: U.S. workforce skills may not keep pace with the needs of a globally competitive economy.

SHORTFALLS. True, the U.S. economy has outperformed its rivals in recent years, due to low inflation and rapid productivity growth. But skills shortages already are hampering many employers. If the shortfalls remain chronic, they will hamstring the economy and impede productivity advances. Without steady growth in the supply of skilled workers, U.S. companies won't be able to capitalize on the new technologies that are helping to spur the New Economy.

Tidal Wave II presents the U.S. with an opportunity as well as a challenge. Putting more Gen Y-ers through college would require major changes. Universities would have to become more efficient to hold down costs, experts say. And government--state and federal alike--would have to cough up $22 billion to $35 billion extra a year, after inflation, on top of the roughly $45 billion in public funds now spent on higher ed, according to calculations based on a study by the Commission on National Investment in Higher Education, a group of business and education leaders.

A tall order? Sure, but not an unrealistic one today, given the $4.7 trillion federal budget surplus projected for the next 15 years. And consider the potential payback. Billions for higher ed are an investment in human capital that would make the U.S. workforce more competitive. By comparison, the Clinton Administration's plan to pay down the national debt to fix Social Security would do little to lift long-term economic growth. ''Spending on social-maintenance programs like Social Security isn't investing in the future,'' says former New Jersey Governor Thomas M. Kean, now president of Drew University in New Jersey and co-chair of the Commission on National Investment in Higher Education. The U.S., says Kean, must ''find a way to divert a greater share of our budget to higher education.''

Accommodating Tidal Wave II would serve an important social goal as well: reducing the yawning chasm between rich and poor families. The red-hot economy of recent years hasn't reduced wage inequality as most economists had expected. Yes, the wage gap has stopped worsening, as shortages of less skilled labor have bid up the pay of low-income workers. But the gap between top and bottom is at a 30-year high.

Educating millions of new college students is the best way to address this, the No. 1 social problem in the U.S. In addition to the overall good of educating more citizens, boosting the share of the workforce with a college education would help to narrow the wage gap. Through simple supply and demand, it would step up wages among those without college degrees, whose ranks would be falling, thereby creating upward pressure on low-skilled wages. Of course, employers could respond by demanding that the U.S. let in more immigrants. But if immigration remains in check, the income gap between high- and low-skilled workers would shrink.

At the same time, meeting employers' seemingly insatiable demand for skills would slow the growth of outsized pay increases among college-educated employees. ''If we could sustain major increases in college enrollments over a decade, it would have a major impact on inequality,'' says Lawrence F. Katz, an economist at Harvard University.

TUITION CRUNCH. With the U.S. economy so healthy, the widespread view is that labor markets are flush with highly trained employees. But many economists have been focused on the recent past. David Card, an economist at the University of California at Berkeley, took a different tack, examining trends over the past 50 years. He looked past enrollment rates, which include many who never complete their studies, to focus on the share of each generation that had earned a college degree by age 30.

For the World War II generation that poured onto campuses with the G.I. Bill, the share jumped from 1% with a degree at 30 to 12%. Boomers lifted that portion to 25%. There was a setback in the 1970s, when the share of 30-year-olds with bachelor's degrees slumped to 23%, after a glut of college workers prompted fears about the overeducated American. Since the early '80s, enrollment gains have mostly been making up the lost ground. Today, only 27% of busters earn a diploma by age 30. ''Demographics have been working against us in the 1990s,'' says Harvard public policy professor Thomas J. Kane.

The coming Gen Y boom provides a chance to get skill levels rising again. The 18-to-24 age group will balloon from 24 million to 31 million by 2015. The problem is, a lot more of tomorrow's students will need help. Most of the past decade's enrollment gains among lower-income and minority families have come from two-year community colleges. Getting a BA, the real ticket to higher wages, has been out of reach for most poorer students. Many are caught in a crunch of rising tuition and a nationwide cutback in student aid. Tuition at public colleges, where 80% of all students go, has nearly doubled since 1980, after inflation adjustments, according to a new study by the Institute for Higher Education Policy in Washington, D.C. Meanwhile, federal, state, and local governments have cut their share of total spending on higher ed. So there's less financial aid available today (charts).

Not surprisingly, students from poor families have fared the worst: Dependent as they are on financial aid, the cutbacks sting more, and their families' incomes have fallen the most. The Institute found that students from the poorest families are paying relatively more tuition vs. middle-class families, as the value of government grants has lagged behind inflation. So the ability to get a degree has been skewed dramatically. In fact, the share of students from families in the uppermost bracket who got degrees has soared from 46% in 1980 to 93% today, according to Thomas G. Mortenson, an education researcher in Oskaloosa, Iowa. But the share fell for students from the bottom quartile, and even those in the middle barely gained ground, he found.

With so many affluent youngsters already in college, more lower-income students will have to attend if national graduation rates are to climb. In addition, higher birth rates among minorities, especially Hispanics, mean that nonwhites will make up two-thirds of the increase in 18-to-24-year-olds through 2015, according to the U.S. Census Bureau. And with the exception of Asians, minorities tend to have lower-than-average family incomes and are most likely to drop out of high school. ''It will require a lot more resources to increase future enrollment rates, because so many of the new students will have fewer resources themselves,'' says Sacramento consultant Samuel M. Kipp III, who studied these trends last year.

Helping more students to get through college would go a long way toward easing the inequality problem. Of course, individuals like Nguyen benefit directly, with better chances of landing higher-paying jobs if they get a college degree. But there's a more profound impact, as well, that reaches into the workings of the country's labor markets. New studies by Katz and others show why. The economists have found that the demand for college-educated workers has been outstripping the demand for nondegreed workers by 3% to 4% a year in every decade since at least the 1940s, when reliable data became available. But the growth in the supply of these skilled workers has slowed in the 1990s, creating a bigger mismatch than ever. Today's low jobless rate hasn't been enough to help low-skilled workers gain ground on more educated ones, largely because the demand for skilled workers continues to exceed supply.

SMALL STEPS? Putting a lot more Gen Y-ers through college would equalize supply and demand. Katz and University of Chicago economist Kevin Murphy have calculated how much college enrollments would have to climb to achieve labor market equilibrium. The conclusion: about 500,000 additional students a year for a decade. This is roughly how many more there would be if Gen Y-ers lift their enrollment by 1% annually. In other words, wage gains would tend to equalize for high- and low-skilled workers if the U.S. came close to 7 million additional students a year by 2015. ''If you want to reverse inequality, we need to increase college enrollments as much as we did in the 1960s,'' says Berkeley's Card, who has done similar calculations.

To see those 7 million Gen Y-ers through college graduation would cost combined federal, state, and local governments an additional $35 billion a year, up from about $45 billion a year now. But that's a relatively small chunk of the $313 billion the federal budget surplus will produce annually over the next 15 years. And many states, which foot most of the higher ed bill, are running surpluses, too. ''Unless we find more money, we'll choke off enrollments for exactly those most underrepresented in higher education today,'' says RAND Corp. economist Steve Carroll.

Washington already has taken a step in this direction. In 1997, Congress passed President Clinton's plan to double federal spending for higher ed, to some $24 billion a year. However, many experts say his new Hope Scholarships and college tax deductions are simply disguised middle-class tax breaks that will do little to boost overall enrollments. Most of the new funds are likely to go to ''middle-class students who would attend college anyway,'' says Lawrence E. Gladieux, policy analyst at the College Board, an association of 3,000 colleges based in Washington, D.C. He and other experts advocate sinking those funds into Pell grants like Nguyen gets, which are restricted to low-income students.

New thinking by colleges also can help keep down the cost, some experts say. To reduce the need for a 1960s-style building spree, colleges must make more efficient use of their resources, recommends California's higher ed commission. For example, colleges should deliver more courses via the Internet. Or they might use classrooms year-round or shift classes to community colleges that run evenings and weekends. Such flexibility also would let more students combine work and study. ''Society must invest more in higher education, but we also must make the whole system more effective,'' says commission member and Xerox Corp. Chief Scientist John Seely Brown.

Many economists today argue that the U.S. and other advanced countries are faced with constantly moving up the skill ladder to keep ahead in a global economy. That goal will be achieved only if the U.S. renews its commitment to higher education. The investments required to help students like Nguyen are steep, but if America doesn't make them, the price could be even steeper.

By Aaron Bernstein

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