Wednesday, August 29, 2018

Degree Deflation and General Equilibrium Expectations

Might a recent example of degree "deflation", illustrate good deflation potential for the economy as a whole? In a recent post for AEI, Preston Cooper writes:
Last week, Kentucky's teachers licensing board made a decision all too rare in today's credential-happy labor market: Teachers in the Bluegrass state will no longer need to get an advanced degree in order to keep their jobs.
The board's move is a rare example of "degree deflation". Previously, Kentucky teachers were expected to obtain a master's degree or other advanced credential within ten years of first becoming licensed as an educator. The American economy has experienced degree inflation in recent years, as employers have attached new degree requirements to jobs that did not previously require such advanced education. 
It will be interesting to see if more educators follow their example. And how might other employers respond? All of this matters, insofar as societal expectations are concerned. In his article, Preston Cooper also noted the opposition from both the teacher's union and Democrats in the state legislature.

The initial good that could come from this scenario, of course, is partial relief in the form of reduced human capital investment costs. One might envision education in general, as part of a knowledge production "factory", whereby aggregate inputs (in this instance at general equilibrium level) required in relation to aggregate outputs, are somewhat relaxed.

However, will there be positive societal expectations regarding degree deflation? It remains to be seen, how the education board's action could affect economic circumstance in Kentucky and possibly elsewhere. Might approaches such as this start a trend? If so, how how to discern whether the deflation effect turns out to be positive?

Only recall that good deflation potential, involves more than just lower input costs and/or requirements, which are sometimes a response to economic downturns - even if mostly regional in nature. Ultimately, positive forms of deflation result in higher aggregate output. Real output gains would make it possible for degree deflation to translate into standard of living gains (perhaps discounting certain quality product implications). Nevertheless, if apparent limitations to economic access were partly responsible for the decision making process of the school board, one hopes the decision doesn't prove to be too much of a gamble.

Much also depends on which sectors decide to take advantage of degree deflation. Will various sectors reduce wages accordingly? If so, other costs of living would need to be responsive to such a reality, in order to (at least) maintain total or aggregate output. Even though more tradable sector activity in the region could lead to greater output; non tradable sectors - given their present dependent status (and time/place logistics) - may lack incentive to increase output. Importantly, the ability to reduce wages could encourage non tradable sectors to enhance professional rewards as well.

Hopefully the licensing board has made a decision that turns out well. Even so, I feel the greatest potential for reduced human capital costs, is via defined equilibrium settings - structured so as to generate additional output on primary market terms. Perhaps defined equilibrium settings would prove more reliable for good deflation, than what much of today's non tradable sector activity is structured to provide. The catch in all this, is that it's difficult for non tradable sector providers to raise output, if and when they function in revenue dependent contexts which could dilute professional income levels in the event of additional supply side capacity.

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