Degree Inflation, Credentialing and Signaling: Employers Now Demand Over Qualification

A new report out today from the Philadelphia Federal Reserve examines the recent trend of employers inflating requirements for jobs. “Addressing Bias and Equity in Hiring” is a literature review by Ashley Putnam, director of Economic Growth and Mobility Project at the Philadelphia Federal Reserve. Literature reviews are a way for scientists to condense current knowledge on particular topic. Putnam didn’t do any original research; instead, she summarizes previous work on the topic.

“Upcredentialing” usually means demanding a college degree for jobs that do not require one. It’s expensive for both job seekers and employers, but the sort term gain is a powerful seduction for employers.

Economists measure upcredentialing by comparing education levels of people currently in a particular job with education levels required in job postings. For example, Putnam cites a 2014 study in which 64% of job posts for executive assistants required a college degree, but only 19% of executive assistants on the job at the time had one.

President Obama gave his first inauguration speech in the mist of the collapse of the industrial economy in 2008. In it, he urged Americans to go to school in order to be ready for the eventual recovery.

That recovery never came, of course. Instead, we find ourselves in a decade’s long project of building a new economy with little resemblance to the previous one. While the 3.8% unemployment rate is wall papered all over the media, the Bureau of Labor Statistics, (BLS), reports that record numbers of people are not in the workforce, the average workweek is only 33 hours and wages continue to stagnate.

The Great Recession was a boom time for the education industry. Admissions shot up by about 30% and there was a bumper crop of college graduates during President Obamas first term.

Unfortunately, the jobs of the 20th century no longer exist for these new graduates.

Katz and Krueger (2017) estimated that 94% of the jobs created between 2005 and 2015 were contingent jobs – “gigs” that generally do not pay a living wage. The National Employment Law Project finds that 60% of newly created jobs are low wage, low skill service positions. These are not the jobs that people responding to President Obamas call for education had in mind.

Old-fashioned jobs that legitimately required skills that a bachelor’s degree conferred have been in short supply, while at the same time the United States has a higher proportion of bachelor degree holders than ever before. About one third of Americans have a bachelor’s degree, and more than half have a two-year degree or certificate.

In spite of record numbers of Americans holding bachelor and technical degrees, employers complain of a “skills gap”. Potential employees do not have the technical skills needed in the workplace.

Peter Cappelli has studied this issue at length in his book, Why Good People Can’t Get Jobs, and finds a number of reasons the “skills gap” is largely a myth. Cappelli points out that many of the skills employers have trouble finding are not the kind learned in a bachelors program. As surprising as it might be, most colleges and universities do not have basic computer skills as a general education requirement.

Often employers look for specialized skills; say the ability to code in Python, or WordPress experience. These skills are mostly self-taught, and consequently have no certificate associated with them.

Another trend among employers is to condense several technical jobs into one position. Cappelli gives the example of an engineer with thirty years’ experience, a master’s degree and a Professional Engineer certificate who could not get a position with an engineering firm because he could not type 65 words per minute.

“David Altig, research director at the Federal Reserve Bank of Atlanta, notes that this broadening of skill requirements is now commonplace. Where in the past a company may have had three positions and only one required computer skills, now ‘one person is doing all three of those jobs—and every job you fill has to have computer skills,’”  (Cappelli, 2013, Kindle Locations 553-555).

Another under the radar development has been the success with which American companies have shifted the expense of education to employees. Like retirement and health care, employees are now largely responsible for financing their education. Education costs are one of the fringe benefits that disappeared with the industrial economy.

On the job training, apprenticeships and learning how to do a new job are outdated. We are now in an era of “onboarding” new employees with the expectation that they must be productive from day one on the job.

Both Putnam and Cappelli point to the bachelor’s degree as a “signaling” device. It may not confer specific technical skills needed to perform a job, but implies the holder has certain characteristics. Employers can infer race, social class and cultural values by a bachelor’s degree and not be concerned with charges of racism or elitism.

Academic studies on the relationship between bachelor degree holders and productivity have been inconclusive. However, recent studies show that “upcredentialing” and using education as a signaling device cost employers a good deal of money.

Adding unnecessary requirements makes it more difficult and time consuming to find candidates whose knowledge, skills and abilities, (KSAs), meet the inflated requirements of employers. Putnam cites sties a study indicating that IT help desk positons requiring a college degree take 40% more time to fill than the same position without the college requirement. Front line construction mangers require 119% more time to fill a vacancy with a bachelor’s degree is required

This translates into huge amounts of money. The Centre for Economic Research estimates that unfilled openings cost the economy $160 billion a year. Degree inflation also increases employee turnover. While one might argue that college graduates deserve a pay differential compared to non-grads, Harvard Business School contends that non-degree holders perform just as well on specific technical needs for particular jobs. Adding a requirement for a degree adds costs but does not seem to have a matching effect on productivity or quality of work.

Entry-level employees bear a disproportionate cost of upcredentialing. According to Putnam, costs at four-year institutions increased by 129% between 1987 and 2017 – far more than wages for degree holders, which have stagnated.

But not everyone who enters college completes it — only a few more than half of students who enter college actually graduate. The remainder has no degree, but carries student debt. The most common reason for dropping out of college is to keep a job; the second most common reasons are lack of affordability of higher education.

None of this will change any time soon. The glut of degree holders will remain as long as the economy does not expand enough to provide jobs for people who have left the labor force.

 

References used in this article:

Cappelli, P. (2013). Why good people can’t get jobs: The skills gap and what companies can do about it. (Kindle ed.). Philadelphia: Wharton Digital Press.

Fuller, J. B., & Raman, M. (2017). Dismissed by Degrees: How Degree Inflation is Undermining US Competitiveness and Hurting America’s Middle Class. Accenture, Grads of Life, Harvard Business School.

Katz, L. F. & Krueger, A. B. (2017). The rise and nature of alternative work arrangements in the United States, 1995–2015 (2016). The Global Talent Competitiveness Index, 2016.

National Employment Law Project, “The Low-Wage Recovery and Growing Inequality”, August 2012, available at http://www.nelp.org/content/uploads/2015/03/LowWageRecovery2012.pdf.

Putnam, A. (Spring 2018). Addressing Bias and Equity in Hiring. Federal Reserve Bank of Philadelphia, Economic Insights, Cascade, 1(98), 9

How are we going to manage the growing and invisible gig labor market?

The Industrial Economy finally sputtered out in 2008, but the chaos of a faltering international banking system on the verge of collapse obscured the consequences of that historic event.

In case you don’t remember or are too young to recall that agonizing slow motion train wreck, here is how Mohamed El-erian characterized those days in his fascinating examination The Only Game in Town:

“In the last three years plus, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others could do the sustainable in order to restore sustainability.”

We now live in a new economy, one in which the old rules and way of doing things no longer work as they once did. The way we measure economic output and activities no longer works like it once did. I recently wrote about this in a blog article, Why the Fed is playing with fire when it increases interest rates.

The same challenge is happening in management, and recruiting.

(See this recent LinkedIn post from a forward thinking recruiter for new ways to address this problem.)

One of the most prominent examples of the move from the past to the future is happening in the education industry. Colleges and universities are replacing traditional full time faculties with part time adjuncts. The trend is not included in strategic planning, but seems to be a gradual piecemeal move towards an all-adjunct faculty. The Chronicle of Higher Education recently published a good overview here.

At the community college where I teach, adjuncts outnumber full time instructors by about 3 to 1, and teach the majority of courses and carry the majority of credit hours offered by the school. The college pays us about one-third the hourly rate of full time professors, but we are limited to about two thirds of the hours. Like most gig work, this is not produce a living wage, has no benefits and offers no job security.

That is typical of higher education and other occupations as well.

How do recruiters include these people in their networks? Is it even realistic to think gig workers might ever hold a traditional full time job?

Probably not, but I hope recruiters address the issue.

If all this seems like it is a relatively minor problem – that 3.8% unemployment number misleads many people – look to the current news on suicide trends. It’s not just fashion designers and celebrity chiefs taking their own lives.

According to CDC statistics, the highest increase in successful suicides over the last fifteen years – roughly spanning the time the economy has been in upheaval – is among men 45 to 64 years old. This is the generation whose most lucrative working years happened to coincide with the collapse of the Industrial Economy and the nightmare of the Great Recession. Those numbers represent the ongoing struggles of people left behind even by the gig economy.

Jessica Bruder chronicles the lives of older people living a life right out of Grapes of Wrath in her book, Nomadland. (Click here for the C-SPAN interview.)

From this perspective, gig workers in the education industry aren’t doing so badly. Questions remain, however.

These highly educated gig workers will likely never afford to pay their student loans; consequently, taxpayers will increasingly foot the current $1.5 trillion student loan bill. This debt is from students to the government, but the government has already transferred this amount to the educating industry. Taxpayers are now reimbursing the government.

(The University of Arizona here in Tucson is a very nice campus.)

How big is the gig economy? How many people are shifting into this labor market?

The short answer is that we don’t know. A 2015 Government Accounting Office (GAO) report estimated about 40% of people classified as employed by the Bureau of Labor Statistics (BLS) as employed were actually gig or “contingent workers”.

A 2018 report from the Federal Reserve Board of Governors puts the number at 31%. Other estimates are from about 10% to 15%.

The confusion stems from the same measurement challenge facing economic analysis examined in the blog post noted above. We have not settled on a uniform way to define and measure the gig economy. Economists are working on the question, (see here and here), but there will likely be no answers any time soon.

The important take away for the recruiting industry is that the first to figure out how to exploit the huge emerging gig labor force could well dominate the industry for decades to come. This is why new ideas such as moving from the existing recruiting model to a networking model holds such promise.

No matter how the recruiting industry addresses these changes one this is certain:

We are living in exciting and interesting times.

 

 

Why You Don’t Have a Traditional Full Time Job and Never Will

The economy has changed in some very fundamental ways in the last thirty years. It has been a gradual process, too slow to make sense as it was happening, but now there has been enough change that a few things seem obvious, at least to me.

The Industrial Revolution is over. Industry was too dirty and too dangerous, so we taxed and regulated it until it moved to Asia. Did you see what the air in China looked like during the Peking Olympics? That is what air in the Steel Belt used to look like in the 50’s and 60’s. Clean, safe factories are too expensive — we refuse to pay for the products made in them, so they went to places where labor is cheap and taxes are low. Blame whoever you like — greedy business people, cheap consumers, the Democrats, the Republicans — it does not really matter because industry is gone and it is not coming back.

With them have gone unions, and they are not coming back either. Unions work only with the threat of strike, and strikes are effective only when work revolves around the needs of a machine, (with an exception I will get to in a minute). The thing that made unions powerful was the threat of workers refusing to tend to the needs of machines that were all located more or less in one place. Service work does not lend itself to unionization because it is decentralized and does not involve machines. Unions are a relic of the age of industry and both are now irrelevant.

The end of industry has effects far beyond manufacturing. Consider how factories were organized. At the end of the 19th century, hundreds or sometimes thousands of people had to coordinate their efforts to make a factory run. Aside from armies in times of war, never before had there been any need to organize such large numbers of people. How did the managers of factories do it? By creating what we now call bureaucracy. The idea was that everyone had a specialized job, and those jobs were done according to rigid procedure. Each worker came to work at a precise time and tended to a specific machine according to an explicit procedure. Deviation from process or procedure was grounds for disciplinary action.

Notice that the only places where unions survive with any vitality are in government? That is because government uses bureaucracy as its organizational model just like factories did. Just about anyone who is paid with tax dollars — social work and defense contractors included — work in bureaucracies. But bureaucracies are relics of the 19th and 20th century. They are fading away in the business world because they are no longer relevant in the internet connected global economy of the 21st century.

Businesses today do not normally organize themselves on a bureaucratic model. Today they identify a core competency — the main thing they are really good at — and outsource the rest. Human resources, accounting, supply chain management, tech support are all contracted out to companies that specialize in those things as their core competencies.

I see a lot of people arguing about outsourcing, but I’m not so sure it is a bad thing. It gives us a chance to cash in on things we love or are really good at. At any rate, outsourcing is another one of those things that is not going away, so we have to learn to turn it to our advantage as best we can. I guess I tend to think about how to make a living in the economy that exists rather than to make judgments about whether it is good or bad.

However, I think it can be useful to think about the events and forces that created the economic situation we are in because understating those forces might give some insight to where we are going and what we need to do to make a living when we get there.

At the end of the Second World War, the industrial world was destroyed. Countries that had been emerging as world economic leaders were in ruins. That meant that anyone who needed anything had to buy it from the United States. We built our incredible country to a large degree on the backs of rest of the world rebuilding from the war. (Let’s not forget the Marshall Plan, however. This was not robbery. More like indentured servitude, but even that came to an end.)

By the 1980’s the rest of the world caught up and we were competing with the losers of the war. Japan made better cars, so we bought them and US auto manufacturing began its long death spiral. The few remaining US car manufactures are not really US at all — they are international consortiums that assemble what was manufactured somewhere else. Zenith was the last domestic electronic manufacturer, (sold to Korean firm in 1995), and now just about all our electronics comes from Asia. China now makes all the odds and ends we need for daily life and we gladly buy it at Wal-Mart.

Remember all those years we felt guilty about exploiting Third World countries? Guess what! They are not Third World anymore. We live in a global economy and now people, businesses, and countries on the other side of the world are as economically relevant as different states were in the past. When I graduated from college in 1980, it was a big deal for classmates to move to another state to start their careers. When I earned my MBA in 2003, some of my classmates were considering going to India or Asia to (jump) start their careers.

As those other countries increase their share of world wealth, ours declines. I do not think that is a huge tragedy; it is just a sign of changing times. Things are evening out in the worldwide economy, but this happened once before. Things are similar to where they were at the beginning of the 20th century, with the United States competing toe to toe with Europe. Now, of course it is not just Europe, but Asia as well. We are no longer the undisputed economic super power. Things are averaging out, and our standard of living is averaging out towards that of the rest of the world.

The United States is turning into a two-class society, with people doing either pretty well or not well at all. We have known that the middle class was declining for a long time. Now we are able to see the decline for ourselves because we are living though it. Why are we acting surprised? It’s not as if we have not been hearing about the decline of the middle class for the last thirty years.

For all these reasons, (and plenty more), the world is not what it once was. The things we grew up believing in and depending upon are no longer relevant. For the last twenty years or so there has been such a glut of educated and experienced workers that education and experience do not count for much. Employers can hold out for exactly what they want — no more and no less. Being overqualified is just as big a jobstopper as being under qualified. In 2006 12% of the people living below the poverty level in Tucson, (where I live), had at least a bachelors degree. Nationally, men over the age of 40 — the age were work experience is supposed to pay off — had longer spells of unemployment than those under 40.

It used to be that a professional was a doctor, lawyer, or maybe an engineer. Someone who was so highly educated that they could work autonomously. Now home health aides in my town are called “Home Health Professionals”. Hairdressers call themselves professionals. So what is a professional? Another concept that has become an anachronism, I guess.

So what to do? We can burn up the internet arguing over whether UP is elitist because it has “professional” in its title, even thought the concept of professional is so diluted it means little. We can hope for the resurrection of unions, but people have been waiting centuries for that other Second Coming and it has not happened yet either. We can demand the government save us, but until we start making money and paying taxes government cannot do much, (not that it ever could, even when it was not a trillion dollars in debt and on the verge of bankruptcy).

Here is what I think.

In one way, nothing much has changed. If you want the world, or the country or the neighborhood to be a better place you have to start working to make it happen. What has changed, however, is that nobody is going to give you a job. Traditional jobs are quickly becoming another relic of the past. The answer is obvious — you have to create your own job. In that way things are much like they were in the 19th century before huge factories and bureaucracies created jobs. Our ancestors in the 19th century were largely entrepreneurs. You probably have shopkeepers, farmers and trades people in your family history, just as I do.

Today we live in a global economy connected by the internet. What can you do on a computer that would be of value to your neighbor? And remember, with the internet your neighbor might be in Boise, or Calgary or Ft. Lauderdale.

No, it will not be easy. So what? Our parents and grandparents did not find the Depression, or the Dustbowl or World War Two easy either. Thank God we are not facing challenges of that magnitude.

I certainly do not have all the answers — or for that matter even a few answers. However, one thing is certain. We will not be able to work our way through the challenges of the 21st century by reinventing the 20th. We need to adjust our thinking to match the reality of the times. But first we have to accept that reality.