Peer Effects

Some of the benefits from attending a more selective school are due to learning from smarter and more dedicated classmates whose parents encourage success in school.  Similarly, student athletes who attend schools with better athletic programs benefit from not only better coaches and facilities, but also by being pushed harder and learning from superior teammates in practice.  In principle the magnitude of these peer effects can be determined in a sport such as track and field where objective measures of an athlete’s performance are readily available.

Most high school state championship tournaments segregate schools by enrollment size to provide greater parity among competing teams.  In team sports, it is obvious that larger schools have an advantage.  A football, baseball or soccer team will be more successful if they have more good players, which is more likely to occur at a larger school.  In individual track and field events it is less obvious why a student from a larger school should be faster than a student from a smaller school.  Larger schools may have better coaches and facilities, but some of the benefit from attending a larger school is the chance to practice and train with superior teammates. 

The magnitude of peer effects became clear as I watched my daughter compete this weekend in the San Diego Section prelims for high school track and field.  In the prelim heats athletes in all events are grouped into two divisions based on the enrollment size of their school.  In the finals for the 1600m (which will be held next weekend) the 12 runners with the fastest times, regardless of school size, compete for positions in the California State High School Championship meet.  This year two of the top twelve runners in the 1600m race were from a smaller (Division II) school.  Over the past six years 25% of the top 12 runners each year were enrolled in a Division II school.

In San Diego about 36.4% of students are enrolled in Division II schools.  If track and field ability was identically and independently distributed across student athletes, 36.4% of the top twelve runners each year, on average, would come from a smaller school.  In fact only 25% of the top twelve runners over the past 6 years have been from a smaller school.  The likelihood of observing so few runners advancing from small schools, due to random chance, is just 2.7%.  In other words there is reasonably strong evidence that female high school runners from larger high schools in San Diego are faster than their competitors from smaller schools.

Larger schools may have better coaches and facilities than smaller schools, but students at larger schools also benefit from training and practicing with stronger and faster teammates.  Peer effects are important for human capital accumulation as well as athletic training.  Students relegated to weaker schools, where many of their classmates are disinterested and unmotivated, are disadvantaged.

A Tale of Two (Types of) Cities

The key to high wages, rapid economic growth rates, and low unemployment is human capital investment.  Economic growth fueled by human capital investment is more durable and stable than growth fueled by real estate speculation.  We need only look across cities, not countries, to understand this fact.

The ten fastest growing metropolitan areas in the U.S experienced population growth of about 40%, on average, between 2000 and 2010.  One typically expects strong economic conditions in cities with large inflows of population.  The promise of better pay and employment prospects is often what causes internal migration.  Today, however, some of our fastest growing cities have the weakest local economies because of the collapse of local real estate markets over the past four years.

The ten fastest growing metropolitan areas between 2000 and 2010 include: Austin TX, Bend OR, Cape Coral-Fort Myers FL, Greeley CO, Las Vegas NV, Myrtle Beach SC, Palm Coast FL, Provo-Orem UT, Raleigh NC, and St. George UT.  Three of these cities: Austin, Provo and Raleigh have a much more educated workforce than the cities whose growth was largely fueled by a real estate boom.  The “human capital” cities have 50% more adults with a graduate degree and 58% more adults with a college degree, per capita, than the “real estate” cities.

The following chart shows the composite unemployment rate between 2000 and 2011 for the three “human capital” cities, the seven “real estate” cities, and the U.S. unemployment rate overall.  The unemployment rate increased sharply in the recession, but less so for cities with a highly educated workforce.

An educated workforce is the key to high wages and rapid economic growth.  The recession took a much greater toll on the economic prospects of less educated workers.  More educated workers are better able to adapt and learn when market conditions change.  Cities that benefited from a real estate and construction boom just five years ago have been unable to generate jobs for all their new residents and now have some of the weakest local economies in the U.S.

Higher Education and the Labor Market Recovery

The February jobs report generated a lot of buzz: employment increased by almost 2.6 million in the past twelve months according to the household survey.  Unfortunately a more careful examination of the data indicates that there has been no recovery for workers with a high school diploma or GED, or for high-school dropouts.  The jobs gap for less educated workers is a structural, not cyclical, labor market problem.  Moreover, the fastest grow segment of the labor market is part-time employment for adults age 20-24, most of whom are enrolled in a two-year or four-year college.  One out of five jobs added in the past year were part-time jobs for college-age young adults. 

There are three groups of workers that account for all of the employment gains in the past twelve months: adults with a college degree, adults with some college education, and part-time workers between the age of 20 and 24. 

Here is how employment has increased in the past twelve months:

• An increase of 3.0% (1.31 million) for college graduates age 25 and above.
• An increase 2.2% (753,000) for adults age 25 and above with some college education.
• An increase of 10.7% (527,000) in part-time employment of adults age 20-24.
• No change in employment for the rest of the labor force.

Almost all of the employment gains in the recovery have accrued to college graduates, part-time workers who are college students, or adults who previously attended college.  About 51% of job gains in the past year were achieved by college graduates, 29% by adults who attended college but did not receive a bachelor’s degree, and the remaining 20% by part-time jobs for adults in their early 20s, the majority of whom are college or community college students.  The remaining 40% of the workforce have seen no net new jobs in the past year.

It is quite remarkable that college-age workers in part-time jobs are responsible for 20% of employment growth in the past year even though they are less than 4% of the workforce.  Many students have delayed college completion and took a part-time job, because of the weak labor market.  These students want full-time employment that will allow them to utilize their education and training, move out of their parents’ homes, and repay their student loan debt.  The growth in part-time employment of college students is an indication of the labor market’s underlying weakness.

Unemployment and Education Snobs

Steve Rattner presented another interesting set of charts on Morning Joe yesterday.  The charts showed how the unemployment rate and average pay are related to educational attainment.  This is an uncontroversial topic for labor economists; when workers lack marketable skills unemployment is a likely outcome.  For many jobless workers chronic unemployment will continue until they acquire more training and/or education.

The following chart caught my eye.  The current unemployment rate of workers with less than a high school diploma is over 14%, and much higher than the rate for more educated workers.

After seeing this chart and others like it, the guests and hosts on Morning Joe took the easy route and derided Rick Santorum’s comments about education snobs.  I would have been much more interested in a discussion of the following facts:

• The unemployment rate is 17.6% for native-born men age 25 to 64 with less than a high school diploma.
• The unemployment rate is 9.8% for foreign-born men age 25 to 64 with less than a high school diploma.
• Foreign-born men account for 57% of the employment of men age 25 to 64 with less than a high school diploma.

Most unskilled jobs that do not require a high school diploma are now held by immigrants.  About 2 of 3 employed male immigrants who lack a high school diploma were born in Mexico and more than 5 of 6 are from either Mexico or Latin America.

Workers without a high school diploma have a difficult time finding a job and many of the available jobs are unpleasant and involve manual labor.  Although immigrants from Mexico and Latin America are typically less educated than American workers and face language barriers, they have lower unemployment rates than workers who were born and educated in the United States.  This is an indictment of our education system and our opportunities for vocational training.  It’s time to address our poor record of educating and training the next generation of workers, especially for students who are unlikely to receive a college diploma.

Textbook Inflation

Last week Apple Computers announced that it is entering the textbook market with an interactive textbook application for the iPad and software to help authors create digital textbooks on a Mac.  Although electronic textbooks have been available for years, Apple’s marketing chief Phil Schiller stated that “education is in the dark ages.”  Apple, Amazon, and other producers of tablets and e-readers may re-invent the textbook by encouraging the development of more interactive and effective methods of presenting information on more portable platforms.

The digital textbook market may evolve more slowly than other markets for digital content because instructors and school boards, rather than students and parents, decide which textbooks are adopted.  Whether students can choose the most effective and convenient textbooks is influenced by the selections and decisions of instructors.

Professors choose which textbooks are used even though students purchase them.  This separation of the selection and purchase decisions may contribute to higher textbook prices.  If professors are more concerned about textbook content than prices they may require more expensive textbooks even if they are only marginally better for students.  Textbook publishers will respond by competing less on price and more on features valued by instructors.

Price competition keeps prices lower, whether the product is a textbook, a prescription drug, or a barrel of oil.  The Bureau of Labor Statistics, which calculates the Consumer Price Index, collects price information for a variety of products and services purchased by college students including textbooks, tuition, and dormitory housing.  The following chart shows that textbook prices have risen faster than the prices of other goods and services purchased by students, including tuition. College textbooks cost about 39% more than they did five years ago.

The fact that textbook prices are increasing faster than other costs of attending college does not prove that professors ignore their students’ interests when selecting textbooks, but it suggests that features such as test banks and lecture materials may be more important for a textbook’s success than price or convenience to the student.  Apple and Amazon will help digital textbooks become more interactive and portable over the next few years.  This innovation will be even more effective if professors internalize the preferences of their students when deciding which textbooks to adopt.