Over Price Education, Getting a Job and Wages

On December 21^st, Yahoo Finance had an article from Business Insider by Abby Jackson where a 35-year-old was suing his law school for his inability to get a job (1). The legal notion is that the school falsely advertised the resultants of what a college education will provide in income. In short its advertising created the illusion that he would get a great job earning a bunch of money upon graduation. Okay the article goes on to say he couldn’t pass the bar exam. A legal degree without passing the bar is sort of useless which makes one really question not the degree but the process of getting into the law field overall. Sort of begs the question, why even have a degree when the key thing is just passing the bar exam?

Meanwhile, back in 2011 a paper was published by Fastweb.com and FinAid.org that talked about the need for greater consumer protections where Private Education Loans are concerned through the new powers granted to the Consumer Financial Protection Bureau under Dodd-Frank (2). The paper suggests a series of to do lists most of which deal with providing loan education to students and families, but also the notion of restoring bankruptcy protections for borrowers of private loans (a really good idea and something that would probably help our law student) (2).

Okay the ideas in the 2011 paper are great, but this doesn’t help those who have went to the Bank of Ed (i.e. education loans provided by the Federal Government). These loans are basically what the Street would call junk bonds or penny stocks. They have no collateral under writing them and there is nothing ensuring that they can be paid except the premise that people with college education get more money.

While I do not disagree with the statistical fact that higher education has historically provided greater income then lower amounts of education these facts are based on observations mostly of the 20^th Century where the bulk of our populace shifted from lower amounts of education to higher amounts as society and technology shifted to the modern era. In my opinion most of what accounts for the higher incomes is the social wage construct that the work associated with higher education should earn more.

When we started the 20^th Century society we pretty much had a three tiered system of wages. The base wage which pretty much everyone got, the middle wage for managers and the like, and the top wage which was given to owners of businesses and socially elite. But once the minimum wage was legally created this created a new fourth and bottom tier. Since that point educational attainment has been imprinted greater on to these four tiers. The minimum wage tier is for the non-educated which has shifted to include now high school diploma holding individuals, the next tier is for bachelor degree holding people, the next tier is for masters and doctoral degree individuals, the highest tier is reserved pretty much for the socially elite or 1% as they have come to be known.

With our law student, he complains about being in the minimum wage tier and inability to support his college loans, which is a big duh since in the social construct of wage distribution he should be at least in the next tier up but he isn’t. Here we have the inherent problem of socially constructed wage distributions -- they are not guaranteed except for the lowest tier currently. There is nothing in the law to automatically provide for support of college loans based on educational attainment.

Currently there is a great focus and talk about raising the minimum wage, and no doubt some of it would be coming from those 20 and 30 somethings saddled with college debt and no way out. A lot of the talk these days is focused on how raising the minimum wage will kill jobs (3). While I do not doubt that on a micro-economic level raising the minimum wage will impact certain localities and particular businesses, overall all in the macro-economic sense this impact doesn’t seem to be as big. Below is chart I created from ALFRED showing two major industries typically where minimum wage work is found and the change in the Federal Minimum wage over the last 75 years or so (4-6).

What you will really note is the fact most declines in employment with these two industries appears to be more related to the up and downs of business cycles than increases in the minimum wage. If the Federal Minimum Wage was linked to a COLA adjustment then we might see a greater macro influence on these employment numbers, but it seems to me the raise in the minimum wage is more impacted by political pressure during tougher times economically. In fact, during periods of business expansion one tends to see the cost of goods and services rise since usually during these expansion periods inflation can occur eroding the value of income. This could explain some of the political pressure during certain periods of time. There also appears to be politically the idea of raising the minimum wage during declining business cycles will somehow improve the economy overall (note the changes during recession periods marked in grey). Although I think this is more politicians catering to a voting public than actual economic policy.

My point is we may be forced to raise the minimum wage politically to ensure the Federal Government is not saddled with a large amount of unpaid student debt. The minimum wage is the only tool the Federal Government has to ensure there is enough income to pay these loans off when the labor pool for higher education work is over crowded with too much supply. This is what one gets for years of promoting higher education will lead to economic prosperity, not unlike that early 20^th Century idea that owning a home will do the same thing and look where that got us in 2008.

Citations

(1) Jackson, Abby. (Dec. 21, 2015). A guy with $170,000 in student loans who can’t find a job in the legal profession is suing his law school and working full time for Uber. By Business Insider published on YahooFinance. Retrieved from http://finance.yahoo.com/news/guy-170-000-law-school-204811509.html?soc_src=copy

(2) Kantrowitz, Mark. (2011). Education Lending Suggestions for the Consumer Financial Protection Bureau (CFPB). Published by Fastweb.com and FinAid.Org.

(3) Soergel, Andrew. (Dec. 22, 2015). Fight for $15 Not All It’s Cracked Up to Be- Research suggests a higher minimum wage could increase costs for consumers and weigh on job growth. U.S. News & World Report. Retrieved from http://www.usnews.com/news/articles/2015-12-22/minimum-wage-increase-comes-with-cadre-of-potential-complications

(4) US. Bureau of Labor Statistics, All Employees: Service-Providing Industries [SRVPRD], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/SRVPRD/, December 24, 2015.

(5) US. Bureau of Labor Statistics, All Employees: Retail Trade [USTRADE], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/USTRADE/, December 24, 2015.

(6) US. Department of Labor, Federal Minimum Hourly Wage for Nonfarm Workers for the United States [FEDMINNFRWG], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/FEDMINNFRWG/, December 24, 2015.