May 1, 2014

HIGHER EDUCATION BUBBLE UPDATE: Welcome to the Well-Educated-Barista Economy: A new study offers an unsettling explanation of why young adults have been hit so hard.

So why aren’t there more housing starts? Answer: Because new households are forming at less than 40% of the normal rate. Young adults are living with their parents at much higher rates than before the Great Recession. Many cannot afford monthly rental costs, let alone come up with the down payments they need to qualify for mortgages.

This reflects the continuing travails of young adults in a slack labor market. Among recent college graduates ages 20 to 29, the Bureau of Labor Statistics reports, unemployment stands at 10.9%, more than three points higher than in 2007. A study from the Federal Reserve Bank of New York finds that of the recent college graduates who have managed to find work, more than 40% are in jobs that do not require a college degree; more than 20% are working only part-time; and more than 20% are in low-wage jobs. . . .

These developments are jarring. For the past generation we’ve been telling ourselves and our children that demand for higher-order skills is surging and that a college education is the key to the future. But recent research by three Canadian economists calls this proposition into question. Paul Beaudry and David Green of the University of British Columbia and Benjamin Sand of York University document a declining demand for high-skilled workers since 2000. In response, they say, “high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers, . . . pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force altogether.” Well-educated baristas and unemployed high-school graduates are flip-sides of the same phenomenon. . . .

To explain this, Messrs. Beaudry, Green and Sand argue that as the IT revolution matures, the demand for advanced cognitive skill cools relative to the preceding investment stage, as it has with the maturing of every preceding general-purpose technology. That’s plausible, but so is the even more troubling hypothesis that IT can replace an ever-widening range of higher-skilled workers with less-educated individuals using systems whose inner workings they cannot begin to fathom.

If correct, these economists’ work turns conventional wisdom on its head. It would imply that our wage and employment woes are structural as well as cyclical—that in tandem with the global market for labor, the IT revolution has permanently transformed the U.S. labor market by suppressing the growth of purchasing power on which the economy depends. Responding to this new reality would challenge the innovative capacity of a political system that is hard-pressed to discharge even its most routine obligations.

To be young and underemployed is bad. To be young, underemployed, and $100,000 in student-loan debt is worse.