How the invisible hand points students to a job

They are easy to spot. A certain glaze over the pupils; quick, frequent glances this way and that; puzzled pauses before adjusting course and setting out again in another direction: first year university and college students look so terribly lost during the first few days of school because, in fact, they are.

And quite understandably so: finding the right place to be at the right time is no small matter in a sea of thousands.

But surely the really difficult thing to figure out is not where you should be, but rather what you should be? Engineer or electrician? Anthropologist or accountant? Lab technician or teacher? Make a wrong turn in these hallways and you will pay for years.

But so will the rest of us. The economy needs only a certain number of actors and teachers, and right now probably a lot more electricians. If the post-secondary system gets this mix wrong, the consequences are unnecessarily high levels of structural unemployment, and lower economic growth.

But ultimately it is students themselves who collectively decide how many stage-managers, human rights activists, and biochemists will appear on the labour market in four or five years time.

Can we really trust eighteen years-olds to make these decisions?

Well it turns out that yes we can, or at least with some qualifications.

In a just released study, researchers from the University of Toronto found that students chose their careers with a clear-headed understanding of their potential earnings.

The higher the expected earnings in a field of study, the greater the enrollment.

Morley Gunderson and Harry Krashinsky found that this cold calculus influenced not just the decisions of those who graduated with degrees in Business, but also the scientists and engineers, those in the health sciences, as well as those choosing education.

Even those who studied in the Fine Arts and Humanities were sensitive to price signals: the lower the wages earned by previous cohorts of graduates, the less likely students were to make this their field of study.

But there is one big exception: students choosing the social sciences—that collective which includes the anthropologists, the sociologists, the women studies majors, the criminologists, the political scientists, and yes even the economists—were more likely to enroll, the lower their expected future earnings.

The researchers—good economists that they are—were stumped, writing: “We do not have an easy explanation for this anomaly and it may be simply just that — an anomaly.”

But the effect is strong—among the most sensitive they find—and since it refers to a significant proportion of the student population it is hard to dismiss for the purposes of public policy.

After all, in spite of this finding they draw the implication that to some important degree the market works: a higher wage in a particular occupation sends a signal of a relative shortage and encourages more people to get the necessary qualifications.

Yet, employers in certain parts of the country are repeatedly calling for more workers with the right skills, and the current national unemployment rate of 7.3% likely reflects a significant structural component due to skill mismatches.

Gunderson and Krashinsky may still be right that the market works, but perhaps not as quickly as it could.

Often the blame for this is placed at the doorstep of the universities. Indeed, the Ontario government is currently in the midst of a consultation process on the future of the province’s post-secondary system, which will surely lead some to call for admissions decisions that are more sensitive to labour market needs, and perhaps even a downsizing of the social sciences.

But in a rush to fix things, there is a risk of making matters worse.

It has long been known that periods of excess demand for certain skills are followed by unemployment and falling wages. This happens because incoming cohorts of students making career choices, university administrators setting admissions limits, governments determining immigration policies, and employers who drive the demand for labour, form their expectations of future wages according to past experience.

Indeed, this is exactly how Professors Gunderson and Krashinsky measure earnings prospects, by looking backward. The earnings students can expect to make in five or ten years are assumed to be what previous graduates are making.

A pattern of boom and bust is particularly evident in the market for engineers: witness the run up of wages in IT during the 1990s, the call to open the doors to more computer scientists, and the bust, stagnant earnings and unemployment that followed in the early 2000s.

Just maybe the social scientists are the one’s playing the game to most advantage.

Probably the most fundamental appeal that should be made to public policy is the need for more detailed information. This particular study was based upon a Statistics Canada survey that offers a great template, but as it stands is too small to examine the actual disciplines students are studying, never mind offering information for specific universities. Prospective students and post-secondary administrators would benefit most from this kind of detail before any fundamental reforms are made, and with it market signals may be even more clear.