Many parents in the U.S. are legitimately concerned about the prospects for their college-age children. After all, today’s students face three overlapping challenges: a long-term structural shift as the world’s effective labor supply expands; rising tuition and growing concerns about the quality of public higher education; and the misfortune of graduating into a weak labor market. 

The first challenge arises from rapid shifting of the tectonic plates that underlie the world labor market. Over the past 25 years, the effective global labor supply has at least doubled and by some estimates has quadrupled. This has suppressed wage growth in the developed economies and reduced the share of national income accruing to labor. So far, people without a college degree have primarily borne the consequences. As a result, globalization has widened the inequality between workers at the 90th percentile of wages and those at the 50th percentile.

The effects of globalization are already moving up the wage scale, though, and that trend will likely continue. As Alan Blinder of Princeton University trenchantly noted in 2006, “Many people blithely assume that the critical labor-market distinction is, and will remain, between highly educated (or highly skilled) people and less-educated (or less-skilled) people ― doctors versus call-center operators, for example.” Instead, the crucial distinction is between those tasks that are easily digitized (and thus subject to substantial competition from workers abroad) and those that are not.

As a result, in the future, a college degree by itself will be less likely to guarantee a high wage. Ongoing economic globalization may even reduce the gap between the 90th percentile and 50th percentile, but continue to widen it between the 99.9th percentile and the 90th percentile. As Blinder argues, “Since the distinction between personal services (likely to remain in rich countries) and impersonal services (likely to go) does not correspond to the traditional distinction between high-skilled and low-skilled work, simply providing more education cannot be the whole answer.”

The second challenge for college-age Americans involves falling state government support for public higher education. Almost three-quarters of all college students attend public schools, and state governments have provided primary support for these institutions. But revenue constraints, combined with rising Medicaid expenditures, push states to reduce spending on colleges and universities.

The experience of the past few years has been consistent with what the economist Tom Kane of Harvard University and I showed in a series of papers several years ago: Pressure from rising health costs causes states to cut back their relative support for higher education, especially during economic declines. And the education funding never returns to its pre-belt-tightening level.

In 1977, state appropriations for higher education averaged $8.50 per $1,000 in personal income. By 2002, after cutbacks during recessions, it had fallen to $7 for every $1,000 of personal income. And last year, after further reductions during the latest recession, it had declined to $6.

The most recent spending cuts have tended to be largest in those states with the sharpest increases in Medicaid spending, as Kane and I had found for previous business cycles. For example, from 2008 to 2010, for every percentage-point increase in the share of a state’s general-fund budget devoted to Medicaid, funding for higher education was reduced, on average, by 3 percent.

With less money from state coffers, public colleges and universities are under pressure to both raise tuition and reduce the quality of the education they provide. In general, despite significant tuition and student-debt increases, spending per student at public universities hasn’t kept pace with that at private universities. And this, in turn, manifests itself in various quality indicators.

Kane and I had documented, for example, a decline in assistant-professor salaries relative to those at private universities from 1980 to the early 2000s, driven by the cutbacks in state support. Data from the American Association of University Professors indicate this trend is continuing.

In 2000, an assistant professor at Stanford University earned an average of 9 percent more than an assistant professor at the University of California at Berkeley. By this year, that gap had widened to 17 percent. Eventually, these differentials will affect where top professors choose to teach.

Some admittedly imperfect indicators suggest the quality of public higher education is already fading. For example, in 1987, both UC Berkeley and the University of Michigan were included in U.S. News & World Report’s ranking of the top 10 universities. By this year, there were no public universities in the top 10 ― and UC Berkeley, the top-ranked public school, had fallen from fifth to 21st. For students who can’t get into or afford private universities, this is a problem.

The final challenge for college graduates is to enter a labor market with a higher-than-usual unemployment rate. A recent study estimated that every percentage-point increase in the jobless rate depresses wages for new graduates by about 6 percent. Even 15 years post-graduation, this effect fades only a bit, to about 3 percent. Since the unemployment rate is currently roughly three percentage points higher than its long-run level, after 15 years today’s graduates can be expected to earn about 10 percent less than if they graduated into a normal employment situation. Weak labor markets knock young people off course for years.

Our ability to address these three problems is inversely related to the order in which I have presented them: With very aggressive action to boost the economy today (including through ambitious policies on housing and by coupling additional stimulus with long-term deficit reduction), we could significantly strengthen the labor market today. By moving toward an emphasis on quality rather than quantity in health care, we could help slow the upward trajectory of health costs, which are crowding out state support for higher education.

The hardest problem of all, though, is the first one. Even assuming away the dysfunction of our political system, for most new college graduates, we have precious few serious strategies to offset the increasing digitization and globalization of the labor market.

One place to start would be to focus on raising productivity in public higher education, so that we could do a better job of delivering quality with constrained budgets. Would we be better off if research dollars were even more concentrated in fewer institutions, and a larger share of faculty specialized in teaching (which is often given short shrift at research universities)? Can more businesses partner with public colleges to create curriculums to teach specific job skills? Can remote learning and online coursework, especially for remedial subjects, finally realize their potential?

The present situation for college kids is so uninspiring, we should experiment aggressively to find the best ways to improve it. 

By Peter Orszag

Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own. ― Ed.