Degreed & Unemployable

Economists have noted with some surprise that the United States is recovering from the “Great Recession” considerably faster than Europe. Since the crisis was more or less manufactured in America, pundits assumed that we would take the longest to recover.

The secret is the striking rise in American labor productivity, which economists consider the magic formula for stable growth. Hourly worker output in the United States grew by a stunning 6.3 percent for the year through March 2010—the second fastest on record.

But look closer. That spectacular productivity gain was compounded from a 3.1 percent rise in total output and a 3 percent fall in employment. Workers are scared and working their tails off, even as corporate profits soar. So stock markets are up strongly over the year, and with free loans from the Federal Reserve, Wall Street bonuses are back at near-record levels. Hooray.

The conventional wisdom, of course, is that banks must heal first, and then the economy will shift into a normal employment recovery. But the new realities of labor markets may upset the standard scenarios. Claudia Goldin and Lawrence Katz are Harvard economists who have made a specialty of analyzing the relation between education, employment, and pay, using a large historical database that tracks those trends in great detail as far back as 1915. The 1940s, for example, were marked by very high demand for high-school graduates—new industries like aircraft builders needed literate production workers. That sharply narrowed the pay gap between high-school and college graduates. College graduates improved their position somewhat in the ’50s and ’60s, but the “college premium” shrank dramatically once again in the ’70s. That wasn’t because of a fall in the demand for college graduates; it was because of a big jump in supply—the sudden flood of boomer-generation college graduates. Despite the ups and downs, however, the long-run return to higher education has been positive and surprisingly stable. The impact of immigration turns out to be quite small.

The 1980s mark a kind of firebreak in the long-term trends. The wage premium to education accelerated sharply, and has continued to accelerate into the current period. But there are two distinct subperiods. In the ’80s, the jump in wage inequality was caused by a sharp jump in demand for more highly educated workers, driven by the explosion in computer technology. From about the ’90s, however, the continued high-wage premium for education is driven more by supply shortfalls, for there has been a dramatic slowdown in college completion rates. For the first time since the founding of the republic, that is, American education is not keeping pace with technology. Companies are paying top dollar for highly qualified people because they are so scarce.

This problem won’t be solved just by ramping up graduation rates. Why not? A clue lies in an odd depression in the middle of the national skill/pay profile. Unusually, both low-end and top-end workers have improved their position relative to the “middle-skill” worker. The improvement at the low end is probably because the harsh winnowing of jobs over the past couple decades has finally hit a wall. You can’t automate away, or outsource, hairdressers, gardeners, and home health aides, so their position has stabilized and even improved a bit. At the other extreme, of course, the highly educated continue to do very well.

But the middle-skill person, the mere college graduate, has been losing ground. In times past, many so-called middle managers were devoted to tasks like collecting data and reformatting it into management reports, or supervising the people who did. They needed to be literate and numerate, diligent and reliable, but not especially technical. The information revolution has wiped out huge swaths of such jobs. The average white-collar worker may now be in the same position as the highly paid unionized factory operative of a decade or so ago.

In other words, just finishing college may no longer cut it in the job market. So jobs for highly qualified people are going begging, both because college completion rates are dropping, and because too many recent graduates don’t have the required skill sets anyway. Hence the slow job recovery after the 2002 recession, and the even slower one now.

The breathtaking challenge is to ratchet up the quality of the average college degree and to expand the educational pool. Doing so will require national action and extraordinary perseverance. Given the country’s current incapacities, one must be pessimistic.