There is probably no issue of more concern to students than the rising cost of tuition. The average debt load for graduating undergraduates at the University of Minnesota is $27,578, according to One Stop Student Services. Beginning one’s career with that much debt means that it’s imperative to find a job that pays well enough to manage it.

Student advocates push the government to find ways to decrease tuition and loan debt. Finding strategies to make higher education cheaper is a popular political issue, but there’s an adverse effect to such policy prescriptions.

Decreasing the price of a college education increases the demand for it. This results in an increased supply of college-educated students entering the job market. Unless the labor market can somehow replicate with an increased demand for college-educated workers, there will be more graduates fighting for the same number of high-paying jobs. If the labor market does not increase demand concurrently with the increased supply of educated workers, an increasing share of college graduates will be left with employment prospects not suited to their education levels (i.e., underemployed). A college education will not have increased their earnings, but it will have given them a significant amount of debt.

There is evidence that underemployment is becoming a bigger problem. In 1970, less than 1 percent of taxi drivers had a college education. Today, 15 percent of taxi drivers have a college degree. Similar trends have occurred in other professions, such as firefighting and law enforcement.

The old-school economic view of education is that students invest in education to attain knowledge that makes workers more productive. However, two other competing economic theories have gained traction. The signaling theory posits that education serves as a way for job seekers to demonstrate their good qualities to employers who will then be more likely to hire them. Then there is the consumption theory that hypothesizes that college life is more about lifestyle enjoyment and social trends than an investment in the future.

The most realistic depiction is probably some combination of all three, which makes the best policy prescription less than clear. If the signaling and consumption theories dominate the human capital theory, we can expect subsidizing higher education to create more
underemployment.