The college premium

It is that time of the year when it is hot and humid, and we anxiously glance at stray clouds floating by wishing the monsoon would come. Those of us who have children who have just finished school also look up nervously each time the postman rings, hoping for news about admission offers from some college that would not ask for too high a "donation". Joining this crowd of anxious Indians this year are a group of people so far not known to suffer anxiety in May - the managements of the innumerable private colleges in India. Their anxiety: will they will be able to fill the seats in their colleges with enough students ready to pay "donations" to make the difference between profit and loss for them?
 

The number of colleges in India has risen exponentially from about 5,000 at the time I was a nail-chewing, anxious aspirant to about 30,000 today. And till recently, it looked as if this number was about to explode further. Media headlines heralding "India's challenge in building 1,000 more universities and 50,000 colleges' were a common feature. This year, in a sign of changed circumstances, I have started seeing advertisements offering free laptops, guaranteed internships, foreign tours and the like to prospective students. And also news reports like this one in a national daily: "Since 2011, 225 B-schools and over 50 engineering colleges across India have downed shutters…" Why this sudden shift from boom to bust? Is it merely another indicator of the economic slowdown that the world and India is temporarily passing through or is there something deeper?

A recent book by Claudia Goldin and Lawrence Katz, both professors of economics at Harvard, titled The Race between Education and Technology, throws new light on what factors affect the supply and demand for education (a summary chapter is available free at http://www.nber.org/papers/ w12984.pdf). They studied, among other things, the college graduate "wage premium" for the 1915 to 2005 period - how much more college graduates earned than those who stopped at high school. They found that the typical college graduate in the United States in 1915 earned 70 per cent more than a typical high-school graduate (the college wage premium). This premium then dropped continuously till 1950, when it became a mere 30 per cent; showed an irregular pattern from 1950 to 1980; and then rapidly rose after 1980, such that by the year 2000 college graduates were on an average making twice as much as high school graduates. The decline in the college premium during the 1915 to 1950 period, say Professors Goldin and Katz, is because of a substantial increase in the supply of college graduates in the US, with demand remaining at 1915 levels. From 1950 onwards rapid technological change has steadily increased the demand for college-educated people relative to the supply, and this has resulted in the upward trend in the college premium. In other words, simple supply and demand do a remarkable job of explaining these wage premia.

While similar data is not easily available for the Indian situation (or, more accurately, I have not seen it), here is my construction. When I graduated from IIM Calcutta in 1971 the modal salary for business school grads (there weren't that many of them around then) was Rs 800 per month. The salary for a mere college graduate was around Rs 200 per month and for a high-school graduate was probably Rs 100 per month. By the year 2000 the salary for a typical business school grad had risen to Rs 30,000 per month, that of a college graduate to Rs 10,000 per month and for a high school graduate to Rs 3,000 per month. At the peak of the last economic cycle, 2008, these numbers were probably Rs 80,000 for business school grads, Rs 20,000 for college grads and Rs 5,000 for high school grads. In other words the business-school premium over a mere graduate was four times ("4x") in 1971, 3x in 2000 and 4x again now. The premium for a college grad over a high school one was 2x in 1971, 3x in 2000 and 4x today.

This means that the college premium in India, at 4x, is much higher than that in the United States and has been more or less steady in India for 40 years. Demand for college grads, however, has violently fluctuated. It rose (again, data is from my memory) dramatically in the 1950s and early 1960s propelled by state investments in expanding the public sector, stopped in its tracks from the mid-1960s to the mid-1980s as the country (and the world) reeled from one economic crisis to the next, and started booming again in the late 1980s on the back of the IT and financial services boom. Thousands of engineering and business colleges were set up in India to cater to this demand for graduates with these new technical skills which carried a college premium. Unfortunately, of late, these two sectors seem to have paused for breath.

There is little doubt that the next technological wave will start an upward cycle one of these days, setting in motion a new race between technology and education. The task for educational planners is to correctly guess in the new era what types and levels of education will have a wage premium high enough to attract students and educational entrepreneurs.

Ajit Balakrishnan is the author of The Wave Rider ajitb@rediffmail.com