Underemployment and College Grads: Is There a Wage Premium?

May 17th, 2012 at 5:21 pm

I keep seeing this statistic that large percentages of young college graduates—around half–are un- or underemployed.  This doesn’t surprise me, in that the downturn has been tough on young people in general, though those with college educations certainly have a leg up on those without.

The rhetoric around this part of the debate, especially in tandem with the too high debt levels carried by some young college grads, may veer into over-discounting the advantages of college attainment, even in today’s tough job market.  For example, as I show below, even in jobs where they’re arguably underemployed based on their skill levels and the demands of the job, young college grads get a significant wage bump.

Why?  Probably because they’re bringing some extra value added to those jobs, even when the occupations are categorized as low skill.

First, though, let’s look at unemployment.  Not controlling for age, college unemployment was around 2% before the downturn and has ranged between 4-5% since (4% last month).  That’s a doubling of the rate and a big deal.  But for those with only a high-school degree, the jobless rate went from the mid-4’s to almost 11% in 2010, down to about 8% in recent months.

The Economic Policy Institute has done some of the best work tracking younger workers, and they find that controlling for age matters a lot:

For young high school graduates, the unemployment rate was 32.7 percent in 2010 and 31.1 percent over the last year (April 2011–March 2012), while the underemployment rate was 55.9 percent in 2010 and 54.0 percent over the last year.

For young college graduates, the unemployment rate was 10.4 percent in 2010 and 9.4 percent over the last year, while the underemployment rate was 19.8 percent in 2010 and 19.1 percent over the last year.

The reason EPI’s underemployment rate for young college grads is less than half of the one cited in the media—Gov Romney also cites this “more-than-half” number–is because the latter includes young college grads working in jobs that we tend to view as below their skill levels.

The website ONET provides descriptions of the tasks required across all the different occupations and ranks them 1-5, from “little or no preparation needed” to “extensive preparation needed.”  You’ll find cashiers and food prep workers in the first category, and mathematicians and physicians in the latter.

What I wondered was whether young college grads, even when they’re in level one and two jobs, still get higher pay than non-college grads.  In economese, do “underemployed” young college grads get a wage premium?

In fact, they do.  EPI was good enough to run the numbers for me, and the table below shows a substantial wage premium of 37% for young college grads in ONET job categories 1-2.  A smattering of the relevant occupations and their individual wage premiums are shown in the table (I chose ones for which I had a large enough sample).  Young, college-educated retail sales workers, customer service reps, and childcare workers* earn almost 50% more than their non-college counterparts.

Don’t get me wrong—we want our college grads filling job slots that utilize their skills.  In fact, no one should have to settle for a job below their potential, regardless of their education level.  And when this recovery gains momentum, it will be important for these underemployed folks to move up.  While they get a wage premium even in their less demanding occupations, they would get a much larger one in higher skilled jobs.

But it would be wrong to conclude on the basis of the underemployment shares alone that these young college grads gained nothing from their education.

*If you’re wondering why “childcare worker” is ranked as skill level two out of five, I share your concern.  Here’s the ONET description of the tasks and skills required for childcare workers, in their view.

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6 comments in reply to "Underemployment and College Grads: Is There a Wage Premium?"

  1. Joe Marinaro says:

    Interesting data points here. One would guess that the premium, at least in some of the occupations is the result of the employee’s potential within the company for a higher, more skill required position.

    I’m curious though about the “underemployment” category. How is that defined? What is considered underemployed for an Art History major? Russian Literature? At some point the notion of underemployed needs to be assessed in terms of demand for specific majors and what the position might be.

    For example, is a first line retail sales supervisor an underemployed position for a sociology major?


    • Jared Bernstein says:

      College major doesn’t factor into it–it’s all demand side, not supply side, ie, what the employer needs, task-wise. But you raise an excellent point.


  2. wkj says:

    Couldn’t it be that for some jobs a college degree serves primarily as an indication that the holder is above average in certain general traits, i.e., intelligence, diligence, etc., that a prospective employer wants? In other words, these college-educated employess may get a wage premium not because of the substantive content of their education, but instead because of the validation of their character that is provided by their having completed that education.


  3. Robb says:

    As an underemployed grad, I am under the impression that a lot of the reason so many grads are not employed full-time is because part-time work is the only available work for new grads to get experience for full-time positions.

    This is really companies dodging the full costs of training and taking advantage of the desperation new grads have to use their degrees. The new grad who is underemployed is put in the position of either keeping a job he/she is overqualified for or jumping blindly into an insecure, part-time job to get requisite experience that matches the degree (and, of course, competition for these insecure part-time jobs is heavy).

    Similarly I’ve noticed interns and student emploees used in some organizations as cheap labor rather than as trainees. In the office where I work full-time letting my mind rot and soul grind away, students do even more mindless tasks, nothing that will prepare them for a full-time job here or elsewhere.

    It’s a horrible waste of human capital. People in my position don’t live up to potential and lose morale. People who take the risky route get even more devestated when they don’t make it. Training is left to the individual and (insufficient) public sector as much as possible. I feel bad for the people without education who are pushed out of jobs they can do by graduates who end up trapped in jobs requiring no degree.

    When the Boomers finally do start retirinig (was supposed to happen by now, but the well-off ones are workaholics and the poor ones can’t afford to retire), there’s going to be a massive human capital deficit. The problem will no longer be finding jobs, but figuring out what it is we’re supposed to be doing!


  4. Fred Donaldson says:

    After managing thousands of folks over many decades your conclusion that college grads deserve higher pay in same level jobs is wrong.

    In today’s horrible job market employers can often choose between college or high school grads. They choose college grads in this economy for the lower paying jobs, simply because they can get what they consider overqualified staff. The best of the low pay jobs go first – to college grads – and the lower paying, low pay jobs, go to who is left – high school grads.

    The problems with this is:

    1. Colleg grads serving tables believe the work is beneath them and their attitude is often negative. A high school grad that appreciates the job is a better choice in the long run.

    2. College doesn’t teach you how to work as a receptionist or put up with obnoxious people. Your higher opinion of yourself often leads to demonstrated low opinions of others.

    3. The overqualified are always looking for a better job, so your job for them is really just a stop at the train station of careers.

    4. Some college experiences at formative ages – drinking, cramming, often easy classes – are not conducive to good work habits.

    5. Some work their way through college. Some loaf their way. There is no way to tell by looking at the diploma.

    Hard working folks deserve the same pay for the same work – regardless of what club they joined, the ivy league school attended or their family peerage. It’s an American concept that you are judged by what you actually do.

    I have seen so many high school grads easier to train, harder working and more dependable than many college grads.

    It is sad that acceptance into the labor force should ever require a degree in anthropology to become a waiter, or that a waiter should lose their job to someone – just because that someone has a degree worthless for the job.

    Anyway, I will pass on your article to a young friend, who is working for $9 an hour after ten years of experience in retail, and has a master’s in mathematics. His co-workers are also at $9.

    Unions used to sort out these things rather well. In the Newspaper Guild, for example, reporters were paid acording to years of experience on the job, not whether they attended Harvard or Montco Community College.

    Which leads me to wonder whether the next suggestion is that we pay Princeton grads more than Brown grads, or vice-versa? Is a degree in home economics more valuable to a carpenter than a degree in Latin. Time will tell.


  5. Misaki says:

    “The fact that attending school seem to cause changes in students that employers are willing to pay for does not show that school isn’t all about signaling.”
    http://www.overcomingbias.com/2011/07/investing-in-school-signals.html

    Note that the mentioned paper which estimated that “signaling accounts for one-third of the educational wage premium” was flawed in that it assumed that …

    “Stage 3: Test signal. The firms observe a noisy but informative signal, θ ∈ [0, 1], about whether or not the agent is skilled.”

    weakness: in the model used, skill is acquired at additional cost independent of general efficiency progress from education. Many employers do not test at all for skills for people who are unable to send a signal, heavily distorting the rewards for signalling. In other words significant problems arise when high school education does not even result in a wage offer of minimum wage.


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