Monday, June 30, 2014


Why are there so many underemployed college graduates in the US? 

"About 48 percent of employed U.S. college graduates are in jobs that the Bureau of Labor Statistics (BLS) suggests requires less than a four-year college education. Eleven percent of employed college graduates are in occupations requiring more than a high-school diploma but less than a bachelor’s, and 37 percent are in occupations requiring no more than a high-school diploma;"

The surplus of college graduates  is not because labor is overcapitalized.  College graduates require more capital to justify their employment, (as college graduates, vs.  eg. as hamburger helpers.) It is because capital, that is, the economy, is undercapitalized. 

Of course, this is actually a relative thing. If the increase in human capital was greater than the increase in physical capital, then there would be a surplus of college graduates.  If the increase in physical capital was greater than the increase in human capital, there would be a shortage.  And in some fields, noticeably medicine, there are. In medicine, demand has increased due to the affordable care act, while the supply of doctors has been restricted by the AMA. The result is that doctors, at least in some specialties, command very high fees.  In some of the sciences, on the other hand, where the economy has been losing capital, that is, contracting rather than growing, labor is relatively overcapitalized.  The supply of scientists  has outpaced the demand, as the government and industry have cut back on research.  This has led to an increase in credentialism, that is, an increase in the requirements to obtain a position, and a pool of underpaid research assistants with increasingly bleak prospects.  

There are, however,  some general causes for the undercapitalization of the economy.

One is unequal trade. A country which runs a trade deficit has an increase in the consumer surplus, since things are cheaper, but a decrease in the producer surplus, since domestic companies are unable to make as much profit.  But investment in capital comes out of the producer surplus, and since that is less, capital investment is less.  The (real) economy grows slower.

 Undercapitalized infrastructure is a second. Inadequate infrastructure increases costs, reducing producer surplus and making industry less productive.  In fact, a reduction in the capitalization of infrastructure is to be expected in a mature economy under siege, since  all capitalization is out of the producer surplus. This is also a vicious cycle:  Decaying infrastructure reducing producer surplus reducing ability to maintain infrastructure, etc.

A third cause of the undercapitalization of the economy is the burden of health care.  With the costs of health care approaching 17% of the economy, fewer resources are left for the rest of the economy.  Of course, capitalization of the health care sector increases employment opportunities there, as we mentioned above.

And excessively large and costly financial sector is a fourth:  The financial sector is overhead on a nation's industry.  It does not in itself produce.  Its burden, the resources it consumes,  is proportionate to its size, and subtracts from t he resources available to the real economy.  It is also relatively immune to foreign competition, with results similar to healthcare.

A fifth cause is the inefficient use of what capital already exists:  Consider energy.  Underpriced  energy makes labor relatively overpriced, reducing its use. This increases the ratio of capital to labor in dependent industries.  Both capital and labor are thus used inefficiently. A greater burden is placed on a smaller portion, but a larger portion is left idle, of both capital and labor.  It also reduces capitalization of the infrastructure required for extracting and delivering energy, and thus harms basic industry.   Meanwhile, the labor burden is concentrated on fewer workers, often past the point of diminishing returns. (That labor expelled from production is forced into the inferior market, ie underemployed.) Producers that are less efficient energy users are excluded at the margins, even though they may have used labor more efficiently. They must compete against the(subsidized) more efficient energy users.  While at the same time underpriced energy is put to inefficient uses.  

A sixth and perhaps most important cause of an undercapitalized economy is government. On the one hand, it is overhead.  On the other, in the modern economy its policies help determine the direction of societal growth, and thus those sectors where the economy is invested in and capitalized.  For instance, by overcapitalizing the military and the security state, it detracts from the investment in basic industry required for real growth.  Government has also pursued policies that favored the growth of oligopoly and oligopsony.   Oligopoly, while it increases the producer surplus, reduces the market and thus the need to invest in productive capital.  A consequence is money hoards in the hands of a few, while the rest of the economy is starved.    Oligopsony in labor markets will result in depressed wages in needed sectors, thus shortages in those sectors while at the same time discouraging entry.  Graduates look for work elsewhere in the economy, where growth is depressed.

Seventh, increasing complexity means an increase in structural unemployment, as there will be greater mismatch of training to skills needed by the economy.  

Finally, as we have detailed previously here at the the rich pay themselves too well. If the mean wage was lower, more people would be able to be employed, although whether they would have jobs appropriate to their skills is another matter.