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

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