When speaking about unemployment, arguably the sorest problem in many market economies, “better education” is one of the standard remedies proposed by economists. This recommendation is given to rich and poor countries alike. Yet since I am in Georgia, I am increasingly skeptical about this recipe. To what extent can the education and training of people, or, to use the economic term, the accumulation of human capital, foster economic development?
In Georgia, you may have studied law and you really know your trade, but there is an oversupply of lawyers, and your qualification does not help you much. Likewise, popular subjects like international relations do not yield high returns in the Georgian labor market. In general, many Georgians are formally well trained, even among the unemployed. According to UNDP data, 81% of the Georgian unemployed have completed secondary education, one of the highest proportions worldwide. Yet many Georgian university graduates must cope with depressing economic circumstances.
Many libertarian economists would deny that there is a problem. One of their convictions is that “every supply creates its demand”, an idea going back to the 19th century French economist Leon Walras. He showed in a crude mathematical model that in a market economy an oversupply of something is impossible – price dynamics approach to an equilibrium where in all markets supply equals demand. Ever since, this line of reasoning was elaborated in various ways, transcending the strictly mathematical nature of the original argument.
Libertarians would point at first-order and second-order effects resulting from an oversupply of, say, international relations experts. The first-order effect would be that the compensation for their qualification would go down, causing an increase in demand and, as less people would choose to study this subject, a decrease in supply. Second-order effects would (among others) be that international relations experts would creatively open up new fields of application for their skills. For instance, somebody who was trained to manage and analyze the relation between countries may apply this knowledge to the relations between companies and in this way become a sought-after business consultant. Among libertarians, there is a widely held belief that people will find opportunities to profitably apply their skills, even if there is no instantaneous demand for them.
There are three strong counterarguments. Firstly, the libertarian philosophy is hardly reconcilable with the observable facts. There is unemployment in Georgia, there are highly qualified people struggling to find jobs, and particularly in Georgia it would be rather bold to attribute these problems to an oversized government. Secondly, even if the libertarian promise would be realizable and a truly free market economy would generate full employment, there is no guarantee that the equilibrium wages would be above the poverty line or the subsistence level. Thirdly, even the lowest possible wages will not create demand for certain qualifications. Nobody will ask for the services of wheelwrights anymore, even if they would work for free. Prices do not always align supply and demand.
A GOOD EDUCATION IS A MARKETABLE EDUCATION
So are economists making hollow promises when they praise the benefits of educational reforms? I would not go that far. The call for “better education” is not wrong-headed if one defines good education to encompass exactly those skills that are demanded by employers. Seen in this way, Georgians who study international relations or law are in fact not acquiring “good education”.
Everybody of us has skills that turned out to be economically rewarding and others that were less beneficial or even irrelevant. For most people, namely those who do not work abroad, what determines whether or not a skill is useful to them is the economy of their country. Therefore a good education system equips pupils and students with useful skills for the actual economic circumstances prevailing in their society.
This means that if for most people the economic situation in a country is dim, as it is the case in Georgia, the relevant qualifications may be entirely different from those in advanced Western countries.
USEFUL SKILLS IN A BORDERLINE ECONOMY
For the purpose of comparison, let us look at examples of relevant skills in two countries I know relatively well, namely Israel and Germany. Since the early 90’s, Israel could benefit greatly from the computer expertise of its Russian immigrants and establish an impressive high-tech sector. Yet this success did not come out of thin air. It could only take place because Israel already was what the famous business visionary Peter Drucker called a “knowledge economy”, and, particularly important, because there was sufficient capital available for developing and extending this industry. With the right computer qualification, you can now realize fantastic salaries in Israel, while the same skill would not help you much in Georgia.
In Germany, it is traditionally very lucrative to become a mechanical engineer, as there is a huge machine building industry. The whole country’s economic fortune is centered around this sector. Yet with just little manufacturing industry in Georgia, the improvements that can be achieved through better human capital in engineering are much more limited here.
And so it goes for most other formal skills you can think of – if there is complete economic slackness in your field of expertise, being an expert does not help you much. Consequently, for the huge majority of Georgians, those who are unemployed or underemployed, useful qualifications are of a kind usually not provided by the education system. Knowing how to repair machines, how to patch clothes and shoes, or even how to grow vegetables in a small garden, are essential skills for the survival of many families.
For those few who are formally employed by companies operating in Georgia, the education system should make sure to really meet the wishes of employers. Arguably, there is room for substantial improvement. This, however, is something to be discussed in a separate article.
Comments
I think I tend to agree with (some of) the libertarian arguments.
Of course, the oversupply of formally trained lawyers, international relations "experts" or economists represents a huge loss for the economy (years lost in pursuit of a useless degree, years spent in un- or underemployment, the cost of delivering useless education, including wages of teaching personnel, infrastructure, etc).
Yet, young people (and their parents) will always make mistakes when deciding on their educational choices. And often their seemingly mistaken choices are informed by extraneous considerations such as entering the marriage market, networking, impressing neighbors, avoiding the military service, etc.
Thus, I don't necessarily see how the government can prevent people from choosing "too much" or the "wrong" kind of education. In a way, mistakes about investment in human capital are not much different from the mistakes that businesses and venture capitalists are making when deciding on a new investment.
A libertarian solution to the problem of over-education would be to stop subsidizing university education. A slightly less libertarian option would be to encourage businesses (who are best informed about their needs) to invest in the training and education of their personnel. An argument for subsidizing business-financed training is the existence of spillovers (positive externalities) from such training from one firm to other (competing) firms.
I agree that young people’s (and their parents’) educational choices may be informed by extraneous considerations. However, I also conjecture that students and parents lack the relevant information on the expected or at least on the currently known returns to their human capital investments.
By reading through the ISET blog, I learned about the qualification mismatch in the labor market in Georgia. With regard to higher education choices, I think that one cost-effective way to fight the problem is to repeatedly collect representative data on the employment situation of university alumni and to present it to the prospective students and their parents.
The list of potentially relevant variables for each university degree could be: mean duration of study, mean entrance wage in own profession, share of alumni working in own profession, share of alumni that work in a given (not own) profession, share of unemployed alumni in the first one/two/three years after degree completion. For example, one, clearly made up, entry in such data set could reveal that between 2012 and 2014 a BA in economics lead to a mean entrance wage of x within the economics profession. Yet, in the first two years after getting their degree only 11 per cent of alumni actually got a job in their field. 15 per cent found work in business (with median wage of y), 29 per cent became taxi drivers (with median wage of z), and the rest was still unemployed.
There are certainly many issues to consider when deciding how to build such a data set: what variables to include, what data to pool, whether to use only current figures or to provide also estimates on future developments, etc. The general idea, however, is simple. Policy makers could enable prospective university students and their parents to make better (informed) educational choices by visualizing that e.g. a BA in economics in Tbilisi can earn them a comfortable living AND increase their chances of excessively driving the streets of their nation’s capital.
Finally, I would like to stress that visualization of information, an illustrative and succinct presentation that delivers the central message, is vital if one wants to affect people’s choices. I doubt that students and parents will study volumes of spreadsheets, calculate expected returns, and analyse risks to derive their optimal occupational choice. On the contrary, they may be overwhelmed and discard the data altogether. As a result, extraneous considerations such as image concerns and wishful thinking may become even more salient.
Improvements demands creativity (which were not included in Soviet education system) and hardworking (reasons of which is ambiguous) skills along with education, At first somebody should create that workplaces for others to be able to work, then you should be hardworking adopting to markets need and not wait when market will adopt to you (If Mohammed will not go to the mountain, the mountain must come to Mohammed.)
Eric, I agree that young people’s (and their parents’) educational choices may be informed by extraneous considerations. However, I also conjecture that students and parents lack the relevant information on the expected or at least on the currently known returns to their human capital investments.
By reading through the ISET blog, I learned about the qualification mismatch in the labor market in Georgia. With regard to higher education choices, I think that one cost-effective way to fight the problem is to repeatedly collect representative data on the employment situation of university alumni and to present it to the prospective students and their parents.
The list of potentially relevant variables for each university degree could be: mean duration of study, mean entrance wage in own profession, share of alumni working in own profession, share of alumni that work in a given (not own) profession, share of unemployed alumni in the first one/two/three years after degree completion. For example, one, clearly made up, entry in such data set could reveal that between 2012 and 2014 a BA in economics lead to a median entrance wage of x within the economics profession. Yet, in the first two years after getting their degree only 11 per cent of alumni actually got a job in their field. 15 per cent found work in business (with median wage of y), 29 per cent became taxi drivers (with median wage of z), and the rest was still unemployed.
There are certainly many issues to consider when deciding how to build such a data set: what variables to include, what data to pool, whether to use only current figures or to provide also estimates on future developments, etc. The general idea, however, is simple. Policy makers could enable prospective university students and their parents to make better (informed) educational choices by visualizing that e.g. a BA in economics in Tbilisi can earn them a comfortable living AND increase their chances of excessively driving the streets of their nation’s capital.
Finally, I would like to stress that visualization of information, an illustrative and succinct presentation that delivers the central message, is vital if one wants to affect people’s choices. I doubt that students and parents will study volumes of spreadsheets, calculate expected returns, and analyse risks to derive their optimal occupational choice. On the contrary, they may be overwhelmed and discard the data altogether. As a result, extraneous considerations such as image concerns and wishful thinking may become even more salient.
You definitely have a point, Nikita! ISET would be quite interested in undertaking such regular employment monitoring program in collaboration with the relevant Georgian ministries (education &science and labor, health and social protection). This would be extremely useful for the country's future students and their worried parents. And for well-managed universities and vocational training institutions that care about what they do. You sound like you know what you are talking about, so in case you are in Georgia perhaps we could collaborate on this one (I am actually quite serious about it)