August 22, 2011
Economics Group Special Commentary
John Silvia, Chief Economist john.silvia@wellsfargo.com ● (704) 374-7034
Tim Quinlan, Economist tim.quinlan@wellsfargo.com ● (704) 374-4407
Joe Seydl, Economic Analyst joseph.seydl@wellsfargo.com ● (704) 715-1488
The Kids Are Alright Facing the most challenging job market in at least a generation, today’s younger workers are currently confronted with economic realities that have forced them to reconsider career choices that might have been foregone conclusions just a few years ago. Imagine looking for work if the unemployment rate jumped to 17.4 percent. Now, consider that is the actual unemployment rate for the age cohort of 16 to 24 year olds across the United States. Once considered the key to greater economic freedom and financial success, the value of a college education is being called into question. In the wake of the recession, an outpouring of reports have cited increasing tuition costs, escalating student-loan debt burdens and diminishing job opportunities for recent college graduates as justifications for younger workers to forego college. How can economics help today’s youth make an informed decision about what can fairly be described as one of life’s most important choices? Our analysis suggests that the decision of whether to attend college, pursue a technical degree or discontinue education after high school not only plays an important role in helping young people find a job, but also completely changes the trajectory of a prospective student’s lifetime earnings. With the constant growth of globalization and the shifting trends in the production of goods and services, we also consider the eternal question of passion versus practicality as it relates to pursuing a course of study. In addition, we survey the employment landscape to provide a snapshot of how different generations are staggered across the labor force and what that distribution means for younger workers seeking employment today, as well as how changing demographics will likely shake things up in coming years. Finally, we consider the role of fiscal policy and what federal spending cuts may mean for higher education in the years ahead.
Is College Still Worth It?
Today’s younger workers are currently grappling with the most challenging labor market for their age cohort since the Great Depression. The unemployment rate for workers between the ages of 16 and 24 is nearly twice the national unemployment rate, and participation in the labor force among younger workers has plummeted in recent years, compared to prior economic recessions in the 1970s and 1980s (Figure 1 & Figure 2). Figure 1
Figure 2 Youth Unemployment Rate
Labor Force Participation Rate
Percent, Seasonally Adjusted
21%
21%
16-24 Years of Age, Seasonally Adjusted 74%
74%
68%
68%
62%
62%
56%
56%
16 to 24 Year Olds: Jul @ 17.4% U.S. Average: Jul @ 9.1% 18%
18%
15%
15%
12%
12%
9%
9%
6%
6%
3%
3%
Labor Force Participation Rate 16-24 Year Olds: Jul @ 54.2%
91
93
95
97
99
01
03
05
07
09
11
50%
50% 70
75
80
Source: U.S Department of Labor and Wells Fargo Securities, LLC
This report is available on wellsfargo.com/economics and on Bloomberg WFEC
85
90
95
00
05
10
Once considered the key to greater economic freedom and financial success, the value of a college education is being called into question.
Today’s younger workers are currently grappling with the most challenging labor market for their age cohort since the Great Depression.
The Kids Are Alright August 22, 2011 One subset of the younger population is performing relatively well in today’s labor market: those who are college educated.
WELLS FARGO SECURITIES, LLC ECONOMICS GROUP However, despite the gloomy picture the media continues to paint regarding younger workers, one subset of the younger population is performing relatively well in today’s labor market: those who are college educated. As a share of the total population, employment among recent college graduates between the ages of 16 to 24 has increased steadily since mid-2010, whereas the employment-to-population ratio for those in the same age cohort without a college degree has yet to show any upturn (Figure 3). 1 Figure 3 Recent College Grads vs. Same-Aged Workers Without College Degree Employment-to-Population Ratio, 12MMA, Seasonally Adjusted 0.600
2.50 Aged 16 to 24 With College Degree: Jun @ 0.581 (Left Axis) Aged 16 to 24 W/O College Degree: Jun @ 1.838 (Right Axis)
0.594
2.36
0.588
2.22
0.582
2.08
0.576
1.94
0.570
1.80 2008
2009
2010
2011
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC
While it is not surprising that, in terms of employment, recent college graduates are faring better in the labor market than their counterparts without a degree, this is only one side of the benefit versus cost equation. Many observers have cited rapidly increasing tuition costs and heavy student-loan debt burdens as highereducation disincentives.
Many observers have cited rapidly increasing tuition costs and heavy student-loan debt burdens as higher-education disincentives, causing younger workers to question the overall economic return of a college education. Moreover, many recent college graduates are also reportedly being paid less than what was the case before the Great Recession and working in job functions that are unrelated to their college studies. 2 To be sure, these disincentives do exist. Since 1982, college tuition costs have risen at a rate consistently higher than the average rate of inflation (Figure 4). 3
1
Here, we use employment data from the Household Survey of the U.S. Bureau of Labor Statistics’s Employment Situation Report and population data from U.S. Department of Commerce’s Monthly Personal Income and Spending Report. 2 Godofsky, Jessica, Zukin, Cliff, and Van Horn, Carl. (2011). Unfulfilled Expectations: Recent College Graduates Struggle in a Troubled Economy. Rutgers, The State University of New Jersey. 3 Since 1982, costs for tuition, room and board at public colleges have grown at an average rate that is 2.9 percentage points higher than the growth rate in the Consumer Price Index. Tuition, room and board costs at private colleges have grown even faster, averaging a pace that is 3.3 percentage points higher than inflation.
2
The Kids Are Alright August 22, 2011
WELLS FARGO SECURITIES, LLC ECONOMICS GROUP
Figure 4
College Tuition Costs vs. Inflation Year-over-Year Percent Change
14%
14%
Public Colleges: 2010 @ 4.5% Private Colleges: 2010 @ 2.1%
12%
12%
Consumer Price Index: 2010 @ 1.6% 10%
10%
*Includes Tuition, Room and Board
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
Since 1982, college tuition costs have risen at a rate consistently higher than the average rate of inflation.
-2%
-2% 80
83
86
89
92
95
98
01
04
07
10
Source: U.S. Department of Labor, U.S. Department of Education and Wells Fargo Securities, LLC
Even with these disincentives, however, the benefits of attending college still outweigh the increased costs. And the benefits are not specific to just recent college graduates. Indeed, while recent college graduates have had more success in the labor market lately than their counterparts without a degree, older workers who hold college degrees also continue to perform relatively well. Compared to the broader population, employment among all college educated workers has shown considerable improvement since the recession ended (Figure 5). What is equally important, though, is that earnings of college-educated workers remain considerably higher than earnings of less-educated workers. 4 For example, according to the Bureau of Labor Statistics, median weekly earnings of workers holding a bachelor’s degree are 62 percent above median weekly earnings of workers holding only a high school diploma. 5 Weekly earnings by educational attainment, however, are just a snapshot in time of the substantial pay differentials that exist between college-educated and noncollege-educated workers. A better measure to consider when assessing the relative merit of a college education is to consider the expected lifetime earnings of those with and without college degrees. Fortunately, a recent study by Georgetown University did just that. 6 According to researchers at Georgetown, a worker holding a bachelor’s degree could expect to earn, on average, 74 percent more over a lifetime than someone with only a high school diploma. Moreover, the benefits of higher education become even more pronounced as one furthers his or her education beyond a bachelor’s degree. The lifetime earnings of master’s degree holders and professional degree holders are expected to be 105 percent and 180 percent higher, respectively, than the lifetime earnings of those with just a high school diploma (Figure 6).
The appropriate measure to consider when assessing the relative merit of a college education is to consider the expected lifetime earnings of those with and without college degrees.
4
See Employment: Beyond the Sound Bites—Reading the Signals II (August 1, 2011), which is available at: https://www.wellsfargo.com/com/research/economics/special_reports. 5 As of Q2 2011. 6 Carnevale, Anthony, Rose, Stephen and Cheah, Ban. (2011). The College Payoff: Education, Occupations, Lifetime Earnings. Georgetown University.
3
The Kids Are Alright August 22, 2011
WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Figure 6
Figure 5
Lifetime Earnings by Educational Attainment
All College Grads vs. Total Full-Time Employment
In Thousands of Dollars, 2007-2009 ACS
Employment-to-Poplation Ratio, 12MMA, Seasonally Adjusted 40.5
14.50 All College Grads: Jun @ 14.24 (Left Axis) Total Full-Time Employment: Jun @ 36.0 (Right Axis)
$4,000
$4,000 $3,648,000
$3,600
$3,600
39.5
14.42
$3,252,000
$3,200
38.5
14.34
$3,200
$2,800 $2,400
37.5
14.26
$2,800
$2,671,000
$2,400
$2,268,000
$2,000
$2,000 $1,727,000
$1,600
$1,600
36.5
14.18
$1,304,000
$1,200
$1,200 $973,000
35.5
14.10 2008
2009
2010
$800
2011
$800 Less Than High School Associate's High School Diploma Degree
Bachelor's Degree
Master's Degree
Doctoral Degree
Professional Degree
Source: U.S Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC
Type of Degree: Passion vs. Practicality
So far, we have squared off against the doubters of the value of a college education and employed economic data to demonstrate the value of a four-year degree relative to forgoing a college education altogether. But there is another category of skeptics who raise the question about whether today’s college experience adequately prepares students to become workers with skills that the global marketplace is seeking and for which employers are willing to pay. Pimco’s Bill Gross recently offered what he described as a subjective explanation for the deteriorating value of a college education when he said, “Professorial tenure and outdated curricula focusing on liberal arts instead of a more practical global agenda focusing on math and science are primary culprits.” His first point about the role of professorial tenure is outside the scope of this report, but the second point raises an interesting and age-old question. The reality of today’s high costs for college and high unemployment for younger workers suggests that an emphasis be placed on the vocational, technical and professional pursuits.
We are not out to diminish the value of a liberal arts education. Indeed, the enduring value of an education in how to think can reap lifelong benefits. But the intangible nature of these benefits escapes our ability to measure in dollars and cents. So with all due respect to literature, language and philosophy, the reality of today’s high costs for college and high unemployment for younger workers suggests that an emphasis be placed on the vocational, technical and professional pursuits as well. This is not only true for young people, but also for displaced workers with outdated skills. There certainly exists a structural disconnect in the U.S. labor force, and there are plenty of examples of job postings that go unfilled despite high unemployment as would-be employers beat the bushes for qualified candidates. This supply and demand disconnect between underqualified job candidates and unfilled positions for skilled workers emphasizes the need for retraining and education. More than half of the 8.7 million jobs that were lost during the recession were in the manufacturing sector. That leaves millions of displaced factory workers searching for work at a time when many employers in the manufacturing sector are seeking lower-cost labor overseas. Many of these experienced workers need a fresh education to parlay their experience into new employment opportunities. In today’s globally competitive marketplace, displaced workers seeking re-education as well as college students need to think about the immediate employability of their skills once their formal education is complete. That said, as previously demonstrated, the returns of a college education over the course of one’s lifetime must be considered. For workers who do wish to forgo the four-year college experience, however, there are a few valuable alternatives. For one, vocational and technical schools allow workers to sidestep all of the general education courses that are required at four-year universities and jump right into whichever trade or profession an individual is interested in pursuing. As such, certificates from vocational and technical schools can typically be acquired in only a couple of years. This, in turn,
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lowers the relative cost of tuition for degrees from technical schools compared to four-year colleges. Furthermore, while vocational and technical degree holders have been hit hard by the recent recession, they have not been hit nearly as hard as the broader population. According to special data from the U.S. Bureau of Labor Statistics, since the first quarter of 2008, the employment-to-population ratio for vocational and technical degree holders has fallen 5.4 percent, nearly half the 10.4 percent decline that has occurred for all full-time workers. Entrepreneurship is also becoming an attractive alternative, particularly for younger workers. Last fall, Business Today, which is the largest student-run publication in the country, published an article titled, “How to Drop Out of the Ivy League and Start a Social Network.” 7 Paradoxically, this particular article encourages students to not actually drop out of college and start new businesses, but instead to stay in school and simultaneously pursue entrepreneurship projects on the side. Even though this is probably the most pragmatic approach for students interested in entrepreneurship, many students are actually dropping out of college to start companies. Peter Thiel, a successful technology entrepreneur and venture capital investor, recently started a program called the 20 Under 20 Thiel Fellowship, which encourages would-be college students to forgo higher education and start new technology companies. Thiel’s fellowship seeks to provide 20 student entrepreneurs under the age of 20 with the capital and guidance needed to be successful in the marketplace. 8 It remains to be seen whether Thiel’s fellowship marks the beginning of a new era for the next generation of younger workers and their decisions to attend college, but it is an interesting endeavor nonetheless.
Why Don’t You All Fade Away?
To get a sense of what is driving decisions for today’s most experienced workers, it is useful to consider trends in personal finances that may be influencing older workers to stay in the labor market a few more years. From the 1980s to the early 2000s, aggregate net worth in the United States grew at a pace of about one trillion dollars per year. As Figure 7 illustrates, this long-term trend got whipsawed over the past 11 years or so. The rise and fall of tech stocks around 2000-2001 fueled one surge in wealth (the tech bubble), and then the rise in home values fueled a second surge around 2005-2007 (the housing bubble). That was followed by a simultaneous decline in both housing prices and the value of financial assets, resulting in roughly $16 trillion being wiped off households’ balance sheets in the span of just a year and a half. Housing prices have yet to come back. Stock prices—recent volatility aside—have retraced much of the losses. Where all this fits into the context of our examination of the aging workforce is that, as a result of the hit to their personal balance sheets, many would-be retirees are sticking around in the labor force a bit longer. Older workers are also likely staying in the labor force longer due to concerns about potential changes to Social Security and Medicare as policymakers seek to reduce the longterm projected federal budget deficit. While all of this is certainly understandable, the result of this economic decision to stay in the labor market longer has been fewer available jobs for a growing body of younger workers.
While vocational and technical degree holders have been hit hard by the recent recession, they have not been hit nearly as hard as the broader population.
Many would-be retirees are sticking around in the labor force a bit longer.
7
Perla, Joseph. (2010). How to Drop Out of the Ivy League and Start a Social Network. Business Today Fall 2010 Issue: The New Boardroom: Welcome to the Conversation. Princeton University. 8 Cain, Jonathan and Gillfillan, Ross. (2011). Peter Thiel Announces Inaugural Class of 20 under 20 Thiel Fellows. The Thiel Foundation. http://www.thielfoundation.org/index.php?option=com_content&view=article&id=15&Itemid=21
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The Kids Are Alright August 22, 2011
WELLS FARGO SECURITIES, LLC ECONOMICS GROUP Figure 8
Figure 7
Forecasted Population Change by Age Cohort
Net Worth
Percent Change From 2010 to 2020
Trillions of Dollars
$70
$70
$60
$60
35% 30%
$50
$50
$40
$40
$30
$30
$20
$20
$10
$10 Net Worth: Q1 @ $58.1 Trillion
$0
$0 80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
40%
40%
25% 20%
2010 - 2020 Change in Population Below 25 25 to 34 35 to 44 45 to 54 55 to 64 Over 65
35%
3.9% 8.8% 4.1% -8.6% 17.7% 35.3%
30% 25% 20%
15%
15%
10%
10%
5%
5%
0%
0%
-5%
-5% -10%
-10% Below 25
25 to 34
35 to 44
45 to 54
55 to 64
Over 65
Source: U.S Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC
By the end of the decade, the shift in demographics should clear some of the currently murky waters for younger workers.
Many older workers, however, will eventually retire and drop out of the labor force. The Congressional Budget Office projects that the labor force participation rate will decline by another percentage point to 63.0 percent over the next decade; a decline largely attributed to the surge of aging baby boomers that will inevitably enter retirement. 9 Figure 8 depicts this surge of future retirees by considering forecasted population trends from the U.S. Department of Commerce. As this chart shows, much of the population growth over the next ten years is expected to occur within older-aged cohorts, particularly among workers over the age of 55. By the end of the decade, this shift in demographics should clear some of the currently murky waters for younger workers.
Fiscal Outlook for Higher Education
With renewed discussion among policymakers regarding the nation’s unsustainable long-term fiscal trajectory, the issue of federal funding for higher education becomes paramount. The recently passed Budget Control Act (BCA) of 2011, which raised the nation’s debt ceiling, enacts changes to federal Pell grant funding and to federal subsidies for graduate school loans. Specifically, the BCA increases funding for Pell grants by $17 billion over the next three years—increasing the maximum individual Pell grant by $819 to $5,550—and eliminates the federally subsidized student loan program for almost all graduate and professional students, reducing federal spending on higher education by an estimated $8.2 billion over the next four years. In addition, the BCA also eliminates incentive credits to borrowers who make on-time repayments of student loans, with the exception of those who pay through electronic debiting. 10 Further budget cuts to higher education and research could be harmful to economic growth.
Most analysts agree, however, that the BCA is merely a small step toward what will eventually become a much larger compromise that reins in the long-term projected federal budget deficit (Figure 9 & Figure 10). That compromise will likely include cuts to entitlement spending and some form of tax-policy reform. But there is some risk that if government spending cuts occur on an arbitrary basis without a case-by-case consideration of the economic benefits associated with targeted federal spending, such a compromise could include further cuts to spending on higher education as well as to spending on basic science and medical research. Further cuts in these areas could be harmful to economic growth for several reasons.
9
Congressional Budget Office (March 2011). CBO’s Labor Force Projections Through 2021. Congressional Budget Office (August 2011). Analysis of the Budget Control Act of 2011. Proposal by Speaker Boehner and Senator Reid.
10
6
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Figure 9
Figure 10
Federal Budget Surplus or Deficit
U.S. Budget Gap
12-Month Moving Average, Billions of Dollars
$40 $20
34%
$20
32%
32%
30%
30%
28%
28%
26%
26%
24%
24%
22%
22%
20%
20%
$0
$0
-$20
-$20
-$40
-$40
CBO Alternative Fiscal Situation Projections, Percent of GDP
$40
-$60
-$60
-$80
-$80
-$100
-$100
-$120
-$120
18%
18% Total Spending: 2021 @ 25.2%
16%
-$140 90
92
94
96
98
00
02
04
06
08
10
16%
Revenues: 2021 @ 18.4%
Surplus or Deficit: Jul @ -$102.1 Billion -$140
34%
14%
14% 10
15
20
25
30
35
Source: Congressional Budget Office, U.S. Department of Commerce and Wells Fargo Securities, LLC
For one, investments in education tend to exhibit relatively high multipliers when taking into account the long-term benefits of developing a more productive and highly skilled workforce. This is true more now than ever before, considering the increased demand for highly skilled workers in today’s globally competitive labor market. We have long argued that there exist significant skill gaps in the U.S. labor market whereby many employers cannot find workers with the specific job skills and training that meet their firms’ hiring needs. 11 When it becomes financially easier (via government subsidies) for workers to pursue higher levels of education, those skill gaps become easier to fill, especially when government spending on higher education is targeted at workers who might otherwise not pursue higher levels of education without financial assistance.
Investments in education tend to exhibit relatively high multipliers.
Second, many investments in basic science and medical research have paid tremendous dividends in the past. For example, NASA’s 30-year space shuttle program, which officially ended in late July with space shuttle Atlantis’ successful flight to and from the International Space Station, has been a key driver of numerous technological breakthroughs, including those related to consumer and medical products. Such NASA-developed technologies include 360-degree photography rendering and polymer coating material for implantable therapy devices that treat patients experiencing heart failure. Policymakers should be aware of the economic risks associated with arbitrarily cutting funding for higher education and research. After all, the expected growth in government spending is mainly attributed to future entitlement spending, specifically on Medicare, and not to education and research spending.
Conclusion
The economic realities of the worst job market for younger workers in at least a generation have forced today’s youth to evaluate the costs and benefits associated with a college education. We acknowledge increasing college tuition costs, the escalating student-loan debt burdens and diminishing job opportunities for recent college graduates. Despite those burdens, however, evidence suggests that a college education remains the key to greater economic freedom and financial success.
11
See Cyclical vs. Structural Unemployment: The Debate Rages On (May 18, 2011), which is available at: https://www.wellsfargo.com/com/research/economics/special_reports.
7
Wells Fargo Securities, LLC Economics Group
Diane Schumaker-Krieg
Global Head of Research (704) 715-8437 & Economics (212) 214-5070
diane.schumaker@wellsfargo.com
Paul Jeanne
Associate Director of Research & Economics
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paul.jeanne@wellsfargo.com
John E. Silvia, Ph.D.
Chief Economist
(704) 374-7034
john.silvia@wellsfargo.com
Mark Vitner
Senior Economist
(704) 383-5635
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Jay Bryson, Ph.D.
Global Economist
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Scott Anderson, Ph.D.
Senior Economist
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scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D.
Senior Economist
(704) 715-0314
eugenio.j.aleman@wellsfargo.com
Sam Bullard
Senior Economist
(704) 383-7372
sam.bullard@wellsfargo.com
Anika Khan
Economist
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anika.khan@wellsfargo.com
Azhar Iqbal
Econometrician
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Ed Kashmarek
Economist
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Tim Quinlan
Economist
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Michael Brown
Economist
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Tyler B. Kruse
Economic Analyst
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Joe Seydl
Economic Analyst
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Sarah Watt
Economic Analyst
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sarah.watt@wellsfargo.com
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