January 30, 2011

WHEN HIGHER EDUCATION BUBBLES EXPLODE:

So if it isn’t politics or economics, what is it that lead the people of Tunisia to rise up and overthrow their government?

Tunisia’s big problem is said to be unemployment. But unemployment there is running at somewhere between 13 percent and 14 percent, which isn’t really so bad. The real problem is that Tunisia cannot create suitable employment for the huge numbers of college graduates it creates every year.

That’s right: the education bubble popped in Tunisia.

Tunisia has a gigantic education apparatus that has earned it plaudits for years. Free university education is guaranteed to anyone who passes the government’s exams at the end of high school. As a result, an estimated 30,000 to 40,000 university graduates enter the job market every year. Fifty-seven percent of young Tunisians entering the labor market are college educated.

It turns out that creating a large class of college-educated workers is not necessarily a recipe for prosperity. Tunisia has discovered it can be a recipe for political unrest and mass unemployment. For Tunisia’s recent college graduates, the unemployment level reaches to at least 30 percent. If you count in various forms of under-employment, it’s safe to say that as many as half of Tunisia’s recent college graduates are losing out in the jobs market.

Tunisia has clearly over-invested in higher education. It is spending 7.2 percent of its GDP on education, more than any European or North American country that isn’t Denmark (which manages to spend 7.9 percent of GDP on education) or Iceland (7.5 percent). It’s a very typical malinvestment bubble: keep spending based on expected returns that don’t materialize, and suddenly find yourself with a worthless asset. Whether it’s dot com sites selling pet food, homes near Las Vegas, or really well-educated Tunisians the results are the same.

Luckily, nothing like that can happen here.