The Cascading Labor Market of Underemployment

Tomorrow, when the monthly unemployment numbers come out, we’ll learn that the underemployment and unemployment rates remain relatively high. Big surprise there. According to the latest Freakonomics podcast on NPR’s Marketplace, there’s a new theory for why the high unemployment rate persists. Apparently, we’re getting hit with the side effects of a trend that began over a decade ago. And this trend effects the education sector and all those who might be looking for teaching jobs in the near future.

As Freakonomics economist Stephen Dubner points out, underemployment is an even worse problem in America than unemployment. We have so many people who have been affected by degree inflation that the average citizen is overeducated for her position and the job market for knowledge workers is completely flooded. People who spent years in school training for jobs that pay well can’t find work when they graduate. This isn’t news.

In the past, we’ve always believed (and told our kids) that the more education you get, the better you’ll do in the labor market–that there will be some kind of fair exchange or Return on Education (ROE).

cascading underemployment

But here’s the thing: This just isn’t true anymore. Sure, some people will get good jobs, but many–most even–won’t. Therefore, we as a country are forced to reevaluate the ROE in which we’ve always believed.

High Underemployment and Unemployment Rates Due to “Cascading”

Dubner references a new economics paper that argues our high underemployment and unemployment rate results from an education rush during the nineties that never readjusted to the post-tech boom recession. When life was good in the nineties everyone wanted to go to school and get a great job–and most did. But now our educational pursuits haven’t calibrated with the depressed job market. People keep going to graduate school and going deeper in debt for the promise of jobs that don’t actually exist. And that’s how we end up with this flooded job market and the ensuing degree inflation that goes along with it.

This basically creates a perfect storm for massive underemployment. No jobs at the top, so the highest educated people take the second tier jobs (for which they’re overqualified). The second tier people “push down” to the third tier and so on. This process, known to economists as “cascading,” depresses the economy even further because no one is earning at his potential. Here’s how cascading ends:

Those at the top–like law school graduates for example–are drowning in the debt they incurred and can’t pay off without the jobs for which they trained. Those in the middle are taking low skill jobs that require nothing more than a high school degree. And those at the bottom can’t find any work because all the jobs are taken by more (over)educated workers.

In the Freakonomics podcast, Dubner mentions one guy who attends a job fair and is competing against people with master’s degrees and PhDs for entry level positions. Pretty much the definition of degree inflation.

Underemployment in Education

Like I said, though, this actually pushes down into the education sector, as well. Teaching has never been a field that draws the most skilled people, unfortunately. Some highly skilled people choose to make the sacrifice in order to teach, but most don’t. The pay is so crappy that most self-respecting knowledge workers skip it for something better. For more on teacher pay, check out Why We Should Pay Teachers Like the Professionals They Are.

This teacher pay issue relates to underemployment cascading because the field of education is one of those career tracks that’s now being encroached upon by those who would otherwise pass it by. On the bright side, it means more highly-qualified people will become teachers. On the other hand, though, a flooded market for teachers will cause salaries to depress even lower than they already are. Or, at the very least, it will cause salaries to stagnate.

We’ve seen the effect of this in the college labor market with adjunct professors. If a school gets hundreds of applicants for one crappy-paying adjunct job, why would they have any economic incentive to pay more? All of these education knowledge workers–would-be professors–are cascading down the job line and artificially depressing wages. And, bam, underemployment rates continue to grow.

One way to fix this issue would be to stop cranking out so many overeducated knowledge workers. To stop telling people that getting another degree is always the answer to their problems. And, yes, I have reservations about that advice. I don’t like the idea of telling people not to continue their education. It seems counterintuitive. But if people are earning these degrees in order to get jobs, somebody needs to break it to them that the plan might not work.

As long as our economy operates under the free market, our best recourse against deflation and underemployment is to reduce supply, thereby raising demand. Once employers have to start working to find good employees again, wages will start rising. The question is which generation will take the first step.


*You might also like Master’s is the New Bachelor’s.

  • josh_boldt

    I liked your post, too. Thanks for stopping by, Anthea.