What the Income Report Tells Us About College Grads

This is excellent news. Corporations are more profitable the more wages can be depressed by increasing the labor supply through globalisation, as long as wages are kept just high enough to minimize excessive and costly employee turnover. The reduction in wages has not had a significant effect on consumer spending because consumers have eliminated savings in favor of spending that money. This is an added benefit. No savings means no chance to invest, leaving ownership of income producing assets to a more select group. Employees remain firmly entrenched as employees because they can neither purchase income producing assets nor retire; thus the labor pool will continue to grow and push business costs down further. Additionally, their desperation to keep their heads above water and pay their debts make them more willing to accept reducing real wages because, well, something is better than nothing - and we can always send their job to India. All of this means bigger bottom lines for owners of businesses and other income producing assets. I'm slightly disappointed to see the slight uptick in real wages for recent college grads, but small variations will happen. If we can continue to encourage academic development and technology infrastructure in India, China, and South/Central America we can create more white collar-capable workers to further flood the labor market and drive down costs even more, while lifting incomes of people in those countries enough to create new markets for products. Globalisation works; and these graphs are further proof of it.

*** The only way I can interpret this is the pressure from globalization on college-educated wages. ***

Don't know why that's the only interpretation you can come up with -- I can imagine several others without breaking a sweat!

First, this is still a short term chart, and it may still be showing little other than the after affects of the bursting of the tech bubble still shaking out. Would be interesting to make a much longer-term chart.

But, my own theory is that it's not so much globalization as mediocratization of college grads, and devaluing of the Bachelor's Degree. The college diploma used to signify someone with rare skills and keen intelligence. But nowadays the college degree is the new high school diploma.

And as an ever-larger portion of the population acquire their degrees in Marketing and Psychology and Sports Communications (er, no offense intended), ever lower rungs of the job market are now capturing those less-brilliant college grads. Managers hiring for less-productive positions are able to insist on college degrees to do them, which was not previously the case, and which brings down the average wage.

College degrees are now so common and easy to attain, the perception is that someone without one must truly be a buffoon, and probably a crack addict. That's unfair: we all know smart people without degrees who can do lots of jobs for which degrees are required. But that's the way it is, because the degrees are plentiful and have come to be a minimum standard in many cases.

It's not labor competition from other countries; it's labor competition from the Americans who 20 years ago would not have even gone to college.

Michael, an ideal chart would add two more lines: one showing the portion of the total population that have bachelor's degrees-and-above (I'd assume that climbs each year as the elderly generation dies off); and another showing the average IQ of the total population of people with Bachelor's degrees but not graduate degrees, which I'd guess probably drops (at the risk of being hit with all that "Bell Curve" criticism).

Michael,

Please extend this chart to start from 1990, if possible. You know as well as anyone that 2000 was inflated to begin with. Using that as a starting point is not the best representation.

Furthermore, the salaries of software engineers in India has been rising about 12-15% annually. Sure, US wages stagnate while Indian wages catch up, but the delta has narrowed and the worst is behind us. India's college-educated workforce will soon be 'filled up' and saturated, so that US wages rise again.

Good news for corporate profits, and even for the non-college educated consuming their products.

At least if the supereducated didn't absorb all the benefits, probably not a good assumption. If its the grads, it is probably the ones already in management at these companies and unable to distinguish between hires.

Sir:
American from Stephan Covey to the later writers have one thing that needs looking into. I just read this and thought that this is must for this write up.

Page 98 of the book by Joseph E. Stiglitz “Making Globalization Work, is not just a hype but very confusing. Let me explain. The book ISBN no13-978-0-393-06122-2 published by W.W.Norton has on the back cover the weird comments on the previous book .. Globalization and It’s Discontents”. Back to page number 98 “The problem in the government are highlighted by the manner in negotiation occur. The issue of openness in international discussion has long been a major concern. President Woodrow Wilson put “open convents..
openly arrived at (JES’s italics at the head of agenda….. but this has never been the case.. Worse still, special interests are conducted under the clock of secrecy…
Sir, does this throw the complete scenario a wolf in the sheep skin?
I thank you.
Firozali A.Mulla
P.O.Box 6044
Dar-Es-Salaam
Tanzania
East Africa

I agree with Kartik to the degree that I think a longer-term chart would provide a better picture. But I disagree that charting back to 1990 would be enough to show it. In the big picture 17 years is nothing. At a minimum I'd like to see charts going back to 1960, and 1950 would be even better.

Kevin: I'd like to point out that while your hypothesis has some validity, only about 25% of people have a Bachelor's degree in the United States. Approximately 8% have a Master's and 1.5% have a PhD. Granted, those numbers have been growing in recent years, but it's still a significant minority of the population. India and China will be able to bring many, many more white collar workers online as they improve education. The Internet makes it easy to employ those workers to handle "Information Economy" jobs, reducing the necessity of paying Americans high wages and expensive benefits. Even accountants and lawyers are now being replaced by capable foreign staff at a fraction of the cost. It's beautiful. I just returned from Costa Rica and I have to say they've done a nice job of creating an educated, English-capable workforce. Even some of the most remote villages have public schools, national health care (excellent, so the company doesn't have to pay for it!), and Internet access. I suspect that Latin and South America will soon be producing quality white collar workers for us to outsource to.

It will be interesting to see how this effects the "circular flow of income", which hopefully most of us remember from Economics 101: firms pay households for labor, and households turn around and buy the firms' output. Throttling one flow (payroll flows to households) must eventually throttle demands for products and services. The only way around that I can see are short term, households buying more on credit (nope, they're tapped out), or working more hours to compensate for the lower hourly wages. Quite honestly, the future for young people in this country doesn't appear to be good. This begs the question, what can be done? The best economic thinking I've read in a long time has been some of the stuff done by Herman Daly, a former economist for the World Bank. A lot of this is playing out just as he predicted in the mid-90s. I'll leave it to the curious reader to look up Herman Daly's stuff, he has some great insights and some excellent proposals for a better economic future.

I agree that the 4 year degree has become the new high school diploma--if one gets a non specific degree. Half the reason for going to college is to differentiate yourself from those who are less motivated/goal oriented. Now that so many people have degrees, you can't stand out that way. It's too easy to go to college. What we need is for it to be more difficult to go to college and we need more people to have trade school certificates. Non-specific degrees such as liberal studies, management, or engineering are becoming less valuable over time. Businesses want people who are trained to do a specific type of job (or at least started to train). College is becoming a trade school over time. In order to land a decent job you have to major in a specific field such as Accounting, Architectural engineering, or nursing. You can even get a degree in retail merchandising (a waist of talent in my book).

It would be interesting if there were a way to hold "knowledge value of a degree" constant. Certainly, the knowledge content of the typical non-technical curriculum has fallen over the last 20 years. Perhaps the curriculum change over the time period of the chart is small, but the increasing % of people attending college probably means that the average knowledge level you can assume when you hire a BA grad has declined.

I distinctly remember some guy named Mike Mandel writing that college degrees had sustained an unnaturally high return on investment, and that that ROI was bound to fall.

I think it was the Great Depression that brought out the value of finishing high school both for the individual and for society. The high school graduate is qualified for more highly skilled jobs, and they are kept out of the work force for four more years helping others find and keep jobs.

College is the new high school. It offers skills and credentials, and it keeps people out of the work force.

The problem dates back to the 19th century. The demand for labor has been falling since. Increased automation and rationalization of work has decreased the number of man hours required to provide for our needs. In 1920, the US was half rural and agricultural. It is perhaps 10% today. In 1960, we had a huge manufacturing sector. It is dropping towards 10% even as I type. The number of hours each worker contributes has fallen as well, even as living standards have risen. If you look at the BLS numbers, the 35 hour week is here, now, and we didn't need any Belgian bureaucrats to get it.

The problem is lack of work, not globalization. There are just not enough off shore college graduates who can be brought into direct competition with Americans with a college degree. Sure IIT can crank out graduates, but the labor market is already getting tight in India as reflected in salaries. China has a similar problem with skilled workers.

What do we do when we can get all the food and goods we need with perhaps 10% of the country working? How can the other 90% afford to pay for them? The service sector provides one answer, but it needs some form of subsidy or the value of service wages collapses, demand dries up, and even the hard sectors collapse.

Subsidies have included government make work projects, extending education, militarism, labor unions, wage and hour mandates, welfare, and low interest rates with a loose money supply. The choice is political; there are many combinations that would serve.

Just an interesting and relevant article about wage reduction in the past couple of decades:
http://articles.moneycentral.msn.com/SavingandDebt/LearnToBudget/WhyJoeSixPackCantGetAhead.aspx

Also, for those who may have missed it, the WSJ just did a piece on how 75% of lawyers have seen wage declines in the past 20-odd years.

We really are succeeding at pushing wages down, even in the higher-end professional jobs. Continuing this, we are going to be able to further reduce labor costs for accounting, engineering and other white collar professional work in the next 20 years as we increase the education (thus, supply) of capable people from the 3-billion-strong SE Asian population.

This is relavant to the discussion; an article from the Oct 12 WSJ (link below) showing that the median income has dropped 2% from 2000 to 2005. The top 1% now earn 21.2% of all national income, the highest it has been since the 1920's. In the meantime, the bottom 50% share only 12.8% of the national income, a drop from 13.4% in 2004. I disagree with the logic used to explain the disparity (read the article). The real answer is that the wealthy know that the only way to succeed in capitalism is to own income-producing assets. I do agree with one point in the article - that the stock market rise has had something to do with it. Almost 50% of the stock market - i.e. 50% of public corporations - are owned by the top 1%. Almost 85% of it is owned by the top 10%. If you don't own significant income producing assets you're in a downward spiral you won't be able to get out of; it's as simple as that. With globalisation allowing owners of corporations to increase the supply of labour, suppress wages, and increase profitability there is no reason to think we can't have an even wealthier top 10%. As long as we can keep the masses distracted with pointless single-issue political battles they'll be too wrapped up to follow or understand any of this, and a greater percentage of income can go to those who understand capitalism and use it to their best advantage. Capitalism works when you know how to use it.

Link: http://online.wsj.com/article_email/SB119215822413557069-lMyQjAxMDE3OTEyMjExNTI4Wj.html