The general assumption that most parents in any part of the developed world will encourage their children to receive any education up to tertiary level and get a job.
This was true in the past because employers in the past believe in training and retraining such that anyone with a certain level of education can pickup these new training and apply them to generate output.
In addition, the rate of new knowledge generation and the rate of applied knowledge transfer were not that fast such that the realisation of knowledge capital via training is not costly to the employers. However, the reversal trend is becoming more obvious. Existing institutional settings are not fast enough to keep up with equipping current students with the traits and skills that are required in the marketplace.
Employers find giving training costly because the gap between knowledge attained in higher education and knowledge required to produce output is increasingly opening up. As higher education is seen as an investment and a consumption good, education loans are linked to the global financial market.
Even though most government do provide subsidy to domestic students, the return of high education via earning as graduates is not fast enough to cover the compounding rate of taking up these loans.
Back then, the enrolment rate was slower than the graduation rate of skill labor but now the enrolment rate is faster than the graduation rate. This imply that more and more graduated students are going into the workforce.
In the ideal world, the risk of realising human capital should be equally distributed among the employers, the government and the individual. Such ideal setting allows employers to take a risk adjust return by giving graduates opportunities, prevents the individual from shirking, enable to government to be accountable for their policies.
However, while the government believes the efficiency of the market by linking education loan to the financial markets, the government also inevitably shift the risk of realising human capital to the lender, borrower and the employers.
Employers are engaging multiple human resource technology to find the best talents. They are risk adverse so they preferred to get experienced workers. This is only possible for existing industries. As new technology and innovation drive the “job creation and destruction” process, new industries and new jobs are created. Having the mindset of “I only want to hire experienced workers” in such industries implying that employers are not willing to take risk to create a talent pool but are willing to pay premium for those with the skills.
As such, smart individuals who are aware of these trends will pickup market relevant skills with the help of internet and mobile online course. Some even take advantage of these technologies to apply for credit in universities because they are deem to have more credible productivity signals based on past historical behaviour. Others use cheap transportation technology induced by globalisation to take up internship with their self learn education.
Here 2 scenarios will happen as a result of poor market settings in education, finance and labor and positive externalities enabling a small group of smart individuals, the tragedy of commons happens. The transactions between the conventionally graduating students and the risk adverse employers will be falling over time while the transactions between the self organised students and the same type of employers will be increasing over time. Because most of the students make up the 3 markets, the market will be facing possible collapse over time. Such collapse will potentially lead to economic recessions and social problems.
While it seems like a doom and gloom scenario for most people, it is also a hope for seeing new reforms in these areas. In fact, governments in developed nations are instituting reforms. The USA is setting training partnership between companies and colleges. However, more can be done to ensure the transformation of these 3 markets.
Most importantly, what does this mean to you?
It really depends on the role you’re taking.
If you are an investor, then a long term economic opportunity lies in scouting for educational technology that create and strengthen the links between individual human capital and emerging sectors. On the other hand, if you are holding onto bonds tied to educational loans, you might want to examine the specific factors that enable the borrowers to get jobs and repay their loans.
If you are a government official, then you should consider investing time in thinking about policies that increase more incentive or reduce risk for risk averse employers. One way is to consider introducing payroll subsidy for emerging jobs in emerging sectors.
If you are a student, then you can consider thinking about your career path and linking that with existing learning opportunities using technology such as MOOCs (mobile open online courses), Linkedin. You should also think about learning at a whole new level. One way is to check out existing learning resources such as actualizedlearning.wordpress.com, learnist.
Written by Andrew Liew Weida, 11th September 2013, all rights reserved.