Testimony: Closing California’s Degree Gap

Thank you for organizing this joint hearing on such an important topic. My name is Hans Johnson. I am a senior fellow at the Public Policy Institute of California. PPIC is a nonpartisan, independent research institute and as such does not take positions on bills before the legislature. My testimony today is based on a recently released PPIC report, Will California Run Out of College Graduates?, which I authored with my colleagues Marisol Cuellar Mejia and Sarah Bohn.

Educational attainment is the single most important determinant of economic well-being for individuals, for states, and for countries. As the California economy continues to change, becoming more technical and requiring more skills of workers, a key question is whether the state’s workforce will be ready to meet these future challenges.

To answer this question, PPIC has developed projections of California’s workforce skills through 2030, focusing on the supply and demand for workers with a bachelor’s degree. We find that the state will fall about 1.1 million college graduates short of economic demand if current trends persist—a problem we call the workforce skills gap. We project that 38 percent of all jobs will depend on workers with at least a bachelor’s degree, but only about 33 percent of workers will have one in 2030. These projections are based on recent economic trends and on forecasts that show a continued increase in the demand for highly educated workers, a demand that is not going to be met by expected increases in the supply of college graduates. So the challenge is clear: either improve educational outcomes for Californians or face a future that has relatively dim economic prospects.

Already we see evidence of strong and increasing demand for highly educated workers. In today’s labor market, workers with a bachelor’s degree have better economic outcomes than those with less education, and that advantage is at or near all-time highs. Over time, college graduates have seen lower rates of unemployment and higher wages than other workers—even through the Great Recession and certainly in the recovery—illustrating that college degrees have become increasingly valuable in California’s labor market.

Future Jobs

To assess California’s future job market, we rely on long-term occupational projections from the state’s Employment Development Department (EDD). Here, we are concerned not just with changes in the state’s overall occupational mix but also with changes in skill requirements within occupational categories. Understanding these changes helps to provide a clearer picture of where the growth in demand for college degrees is likely to occur. To do so, we look at both broad occupational categories, such as business operations, and jobs within those categories, such as marketing specialists.

The projections suggest that the mix of occupational categories in California’s labor market is not going to change drastically over the next decade or so. The fastest-growing categories will include both high and low skills. Among the ten fastest-growing categories, five require high levels of educational attainment and five do not. This means that the bifurcation of California’s occupational mix, an important component of wage inequality, is expected to continue.

Because the demand for highly educated workers within occupational categories has been growing over the past decade, even though the mix of these categories is not shifting much, we expect the economy to require a higher share of educated workers by 2030. In most occupational categories, the share of workers holding at least a bachelor’s degree is projected to increase by 2030.

These increases are projected to occur in most occupational categories, from those regarded as high skill (such as management) to those regarded as low skill (food preparation). Some of this increase will be caused by a shift toward specific occupations within broader occupational categories. But the larger shift is likely to be an increase in educational attainment within specific occupations themselves.

Business operations is a case in point. In 2000, about half of the workers in the business operations occupational category held a bachelor’s degree; by 2013, this share had increased to 60 percent. If these trends continue, 74 percent will have a bachelor’s degree in 2030—a 14 percentage point increase over 17 years. But as an overall occupational category, business operations will make up a similar share of the economy as it does today—3.0 percent in 2030, compared with 2.7 percent in 2013.

The increase in educational attainment within this occupational category is occurring because its fastest-growing specific occupations include some with high levels of education—for example, market research analysts and marketing specialists, 75 percent of whom hold at least a bachelor’s degree. In addition, some specific occupations have seen a large increase in the share of workers with college degrees—for example, the share of fundraisers with a bachelor’s degree increased from 44 percent in 2000 to 84 percent in 2013.

Overall, there are no indications that the rocky economic landscape of the recent recession has shifted the trend in demand for highly educated workers. In the past, a strong demand for highly educated workers occurred as the economy shifted toward occupational categories and industries that demanded these workers. But in the 1990s and—based on our current analysis—through the 2000s, the strong demand for highly educated workers has reflected growth in education levels within industries and occupations.

Do these projections indicate a real demand, or are they simply evidence of a trend toward overeducating the workforce? One way to distinguish between these two possibilities is to examine the wage premium paid to college workers—that is, the extra wages employers are willing to pay college workers compared with less educated workers in the same occupational category. Positive and increasing wage premiums for college-educated workers reflect the economic demand for high skills. In general, the college wage premium is large and increasing economy-wide; moreover, we find that within occupational categories, the same is generally true. College-educated workers enjoy positive and significant wage premiums within almost every occupational category. These findings indicate that the strong demand for highly educated workers is likely to continue because employers and the economy require the skills associated with more highly educated workers.

Of course, the labor market does not value all college degrees equally. For degrees in highly lucrative fields, such as engineering and computer science, the lifetime wage premium—that is, the expected present value of the gain in wages by completing college, even after accounting for college costs—can total more than $1 million; but even for degrees with the lowest economic returns, the lifetime wage premium totals more than $200,000.

Future Educational Attainment

The share of adults in the workforce with a bachelor’s degree or more will increase only slightly—about 1 percent—by 2030. To a great extent, this slow growth stems from the retirement of the numerous and very highly educated members of the baby boom generation. Today, the best-educated age group in California consists of adults age 60 to 64. By 2030, these adults will be retired.

In the past, retirees tended to be less educated and relatively few in number—and they were replaced by younger, more-numerous, and more-educated adults. In the future, this will no longer be the case. Indeed, the retirement of the baby boomers represents the first time in California’s history that such a large and well-educated generation is exiting the labor force. This loss helps to explain the size of the skills gap we see in 2030.

California is unlikely to attract enough highly educated migrants from elsewhere to close the skills gap. For a long time, the state has relied on migrants to supply employers with the college graduates they need. Until recently, more of California’s college graduates, by percentage, were born elsewhere in the United States. And since 1980, the share of college graduates from other countries has increased quickly, a reflection of the globalization of the state’s economy—and we expect this to continue. Were it not for these increases, the size of the skills gap would be even larger.

California residents are making slight improvements in educational attainment. Indeed, in 2010, for the first time in the state’s history, more of California’s college graduates were born in the state (37%) than in other states (33%) or internationally (30%). Going forward, California’s best approach to closing its skills gap will be to concentrate on improving the educational attainment of its residents.

Policy Implications

We believe that the most promising approach to closing the workforce skills gap is to concentrate on improving the educational attainment of California residents. Here, I will outline four key strategies for the state and its colleges and universities to pursue. Implementing these strategies—which should be the core of a new state plan for higher education—would require increased coordination across institutions.

First, increase access. Research shows that students are much more likely to earn a bachelor’s degree if they first enroll in a four-year college, rather than in a community college—even when we account for differences in academic preparation. This means that increasing the share of high school graduates eligible for the University of California and California State University would be an important step toward increasing the number of college graduates. It would also improve access for students from low-income families and other underrepresented groups.

Second, improve completion rates and time to degree. Despite progress by both university systems to address these issues, only 19 percent of students at CSU and 60 percent of those at UC earn a bachelor’s degree in four years. Current strategies to graduate more students more quickly should be assessed to identify which are most effective. And new approaches—such as offering colleges fiscal incentives to increase the share of students taking a full, 15-unit course load—should be considered.

Third, expand transfers to four-year colleges. Improving transfer pathways from community colleges to four-year institutions is essential because California relies heavily on its two-year institutions. Currently, the vast majority of community college students do not earn degrees or certificates. Associate degree programs guaranteeing that qualified community college students can transfer to CSU should be expanded. These programs now depend on individual agreements between specific campuses and apply only to specific majors; expanding them to include more majors and transfers to UC is likely to increase the number of students who ultimately earn bachelor’s degrees.

Finally, be smart about aid. Grant and aid programs mean that most low-income and even some middle-income students do not have to pay tuition at the state’s public colleges and universities. But other educational costs are not well covered and student debt has been rising, raising questions about whether state Cal Grants should cover more than tuition. The state should also consider increasing the size of Cal Grants to students attending private colleges that have good graduation rates and low loan-default rates.

In summary, a state plan for higher education should ensure that enough high school graduates are ready for college, enough slots are available for new college students, more community college students are able to transfer to four-year institutions, and more students complete college in four years. Of critical importance, California and its higher education institutions must strengthen access to and success in college for low-income and underrepresented students, who make up an increasing share of the state’s population. Ultimately, closing the workforce skills gap will result in a more productive economy, higher incomes, greater tax revenues, less pressure on the social safety net—and a brighter future all Californians.