The Economics of Choosing the Right Career

For individuals entering the labor market for the first time, there's some good news and some bad news. The good news is that the higher earners, or those with postgraduate degrees, are earning more than ever before. The bad news is this: In the year 2000, four-year college grads actually earned more with their entry jobs than they're earning today. Another way to put this problem is to think about taxi drivers. In the year 1970, only 1 out of 100 taxi drivers had a college degree. These days it's about 15 out of 100. Now having a college degree means you have a much lower chance of unemployment than if you don't finish college at all. But overall, what we see is a lot of waste of talent, of human capital -- people who finish college degrees but don't have the right skills to get the best jobs.

So, there's good and bad news from the labor market. How do we think about what's been driving it? Well, we should go back to the core economic concepts of supply and demand. That is, the supply and demand for labor. To think about how those supplies and demands have changed, let's start with the factor of technology. Technologies have changed, and this has altered supply and demand.

So, think about a lot of older jobs. They were based in manufacturing. You worked in a factory. Maybe you didn't need a college degree at all, but you didn't necessarily need that much fancy training. A lot of people could take these jobs and that helped build the American middle class. Today it's different. You're much more likely to work with computers and work with information technology. And this will affect both the supply and demand of different kinds of labor.

Let's think first about skilled labor. Well, skilled labor -- working with computers -- is much more powerful. The computer enhances the productivity of the skilled laborer. And information technology makes it possible for skilled labor to sell their products around the entire world. And that makes it possible for wages at the top to be higher. At the same time, with information technology, that can be pretty hard to learn. It can be pretty hard to keep up with all of the new developments. So, the supply there is more limited.

Now let's think about how computers interact with less-skilled labor. Well, less-skilled labor might find it harder to work with computers, but there's another factor -- the computer actually might be competing with you. So, in the old days, if you would have gotten a job as a clerk filing papers, well now we do that with software. If you might have gotten a job as a travel agent, a lot of those jobs have gone away. People just book online. So changing technology has made wages rise more at the top, but has held wages down for a lot of other jobs. And new college graduates are experiencing that when they go into the labor market.

The second factor of supply and demand has to do with the growth in global markets. Over the last 35 years, we've seen at least two billion new workers in global markets, often in China and in India, because those countries are now wealthier, freer and more open. Think about how this affects skilled labor. Let's say you're a worker really good at working with computers. Maybe you work at Apple, and you help design the iPhone.

Well, there's now a much bigger market -- the whole world -- you can sell to, and this means the value of your labor, and thus your wages, will be higher. At the same time, say you're a lesser-skilled worker. Well, there are now more people in the global economy you have to compete with. And a lot of them work pretty hard and they're being paid lower wages. So, if you don't have a special skill, you might find your job prospects aren't doing so well, because on the supply side, there's more competition for you.

A third set of factors has to do with slower economic growth, slower productivity growth and slower dynamism in the American economy. For instance, contrary to what you sometimes might hear or read, the number of start-ups in the American economy has been declining each decade since the 1980s. That means there are fewer new jobs. That means there is less of a demand for new labor, and that makes it harder for a new college graduate to get the job he or she wants at the right wage. When productivity growth is low, dynamism is lower, there is less turnover in jobs. And that can be fine if you're an incumbent who already has a great job, but if you're just starting off, that's going to make things for you tougher.

Another way in which labor markets have become more static is that more and more jobs now require what is now called occupational licensing, namely legal permission to do the job at all. Right now, over a quarter of the jobs in the United States require this kind of legal permission, often coming from a state or local government. It may make sense for some jobs, but should it really be the case that you need a legal license to be a barber, or to be an interior decorator? That increases the cost of entering those sectors, it means a lot of time and some money, to get the license. Again, it's good for the incumbents, who face less competition, but it's bad for people starting off in the labor market.

You put all of those factors together, and then what we had happen in this country was the Great Recession starting in 2008. This meant that output was declining, employment was declining. People were laid off. There was a financial crisis. What did a lot of employers do? Well, they froze their hiring. So again, if you were out there trying to get a new job these years, or immediately thereafter, it was harder. And we know from the data that people who start working during bad economic times -- it's slower for them to climb the future ladder of success. So even 5 years out,10 years out, they're earning lower wages or receiving fewer promotions than otherwise would have been the case. So, this has led to a persistent effect on American labor, which has limited opportunities.

So, to sum it all up, the labor market is more about skills than ever before. Yes, finishing college is a great idea, but these days it's no longer enough. What really matters is how much value you can produce for an employer. Labor markets are ruled by supply and demand, and supplies and demands are changing all the time. So, the way to think about how to do well in labor markets is to understand those supplies and those demands.

Take a look at the relative wages of, say, engineering majors versus psychology or communications majors. You might be surprised. In today's world, the momentum is moving toward people who are trained in information technology, who work well with computers and who can exploit growing global markets. When supply and demand are ruling labor markets, the people who do well are those who have an economic understanding of where is demand high, and where is supply scarce.