A Square Peg in a Round Hole

The government’s approach to higher education overlooks changing dynamics

By Jack Salmon

When it comes to higher education, the goal of policymakers has always been the same—to drive up rates of college enrollment and graduation. In his 2009 State of the Union address, for instance, President Barack Obama set a goal for the U.S. to “once again have the highest proportion of college graduates in the world.” Over a decade later, the rhetoric hasn’t changed very much, with President Joe Biden declaring that “twelve years of education is not enough anymore” and that “any country that out-educates us will out compete us.”

But the problem with these and similar statements by political leaders and others is that they don’t make sense given the realities of today’s labor force. In fact, colleges don’t necessarily teach the skills employers need and, for many, may no longer be worth the time, let alone the large and rising tuition costs that often saddle students and their families with huge debts.

Stuck in the Past

Along with proposing free public college tuition for certain households, which is problematic for a variety of reasons, the new administration is seeking to significantly increase federal student aid, with proposals to double the value of Pell grants and considerably expand student aid eligibility. These plans are based on the long-held assumption that increased federal student aid will alleviate rising tuition costs, thereby making college more affordable.

But we already know where this story ends. Since the late 1970s, federal student aid has expanded dramatically: 86% of undergraduates working toward four-year college degrees have received federal financial aid in recent years. But much of the empirical literature on the effects of federal student aid on college tuition prices reveals that, far from increasing accessibility, federal aid has actually made college less affordable.

That’s because colleges have responded to increased federal generosity by reducing institutional aid, so that for each dollar of additional federal aid they receive, students have lost between 60 cents and 83 cents of institutional aid, depending on the type of aid and institution. During 2005–2009, colleges that were eligible to participate in federal student aid programs raised tuition prices by as much as 78% more than colleges that were not eligible. Other studies have found that increased federal student aid could be responsible for generating a 102% increase in tuition during the period 1987–2010.

Another justification that policymakers have used for increased federal aid is based on the long-standing notion that a college degree yields a lifetime wage premium. To be fair, from the 1970s until the turn of the 21st century, college graduates did make significantly higher wages than high school graduates with no college education. However, since the early 2000s, the wage premium for college graduates has stalled, while college tuition prices have roughly doubled in real terms since 2000.

The Wrong Skills for Today’s Labor Market

While increased federal student aid has fueled tuition price inflation, wage premium stagnation is the result of an often-overlooked mismatch of labor market needs and college graduates’ skills. Rather than preparing college students for an evolving and increasingly dynamic labor market, policymakers have largely been consumed by their infatuation with enrollment rates, giving colleges little incentive to effectively prepare their students for a lifetime of work.

Evidence of the mismatch between education and work skills can be seen by comparing the share of bachelor’s degrees conferred by selected fields of study with the skills businesses are currently looking for. Business survey data reveal that the skills most in demand are those used by electricians, welders, mechanics, engineers and IT professionals. In other words, employers are looking for people with training in skills-specific trades. Meanwhile, many 2017–2018 bachelor’s degree students were general-skills majors, including 8% studying social sciences, 6% studying journalism, 6% studying psychology and 4% studying performing arts.

As college students graduate with general-skills majors that aren’t in high demand in the labor market, many of them end up underemployed,working in jobs that require a skill set below their qualifications. Underemployment among recent college graduates has remained high over the past decade, with between 12% and 15% of recent college graduates in low-wage jobs.

While the rise of artificial intelligence is increasing the scope of tasks that can be automated, technological innovation is redefining rather than replacing in-demand skills. The skills mismatch between college graduates and the labor market is a serious problem. Policymakers need to rethink higher education policies, particularly in relation to the one-size-fits-all federal financial assistance programs, but also in relation to other public provisions aimed at driving up college enrollment rates. The United States has a labor force that is overschooled and underskilled and that increasingly lacks the training and work experience needed to create value in a rapidly evolving labor market.