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Richmond Fed at a Glance

June 2018

Demand for Educated Workers Exceeds the Supply

Education

Why isn’t the United States producing more college graduates? It might seem like a surprising question given that the share of the adult population with a college degree is at an all-time high. But, as the Richmond Fed explores in its latest Annual Report, it appears the economy’s demand for college graduates is outpacing the supply, and has been for some time.

One piece of evidence is the growth and persistence over the past several decades of the “wage gap” — the difference in earnings between workers with and without a four-year college degree. Research has shown that for much of U.S. history differences in earnings can be explained by the basics of supply and demand. A consistently higher “price” for more-educated workers thus suggests that the demand for educated workers exceeds the supply.

The Richmond Fed’s interest in the topic stems from the important implications education has for economic growth and continued improvements in standards of living. In large part, growth is driven by increases in productivity, which in turn depend on a society’s collective skills and knowledge — what economists call “human capital.” Data suggest that productivity growth has been slowing since the early 2000s, and one factor might be slower growth in the United States’ stock of human capital. In short, failing to meet our economy’s demand for skilled workers might be hindering economic growth. An additional concern is the connection between economic growth and the appropriate policy interest rate; in general, slower growth translates into a lower rate, which can pose challenges for monetary policymakers.

What is behind the slowdown in educational attainment? As researchers Urvi Neelakantan and Jessie Romero demonstrate, a key factor seems to be inadequate preparation during the K–12 years, as evidenced by the large number of students who enroll in college but do not graduate. The authors also discuss how K–12 preparation varies with socioeconomic status and how “school-choice” initiatives are intended to provide more children with access to high-quality schools. At the same time, the authors note that college is not necessarily the right path for everyone, and that providing more information about other post-secondary options could help more students achieve their full potential.

This year’s Annual Report also features an economic report on the Richmond Fed’s District and a new section titled “Bank at Work,” which highlights the Richmond Fed’s three primary functions as well as its outreach work and support services.

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Jim Strader (804) 697-8956 (804) 332-0207 (mobile)