Higher education expansion, market recognition and unemployment

To meet the future demand for highly educated labour, the “College Enrolment Expansion” policy was implemented in China at the end of the 20th century. But after a few years, new college graduates found it hard to get skilled jobs and some of them were unemployed. Many college graduates had to do unskilled work, living in groups, settling on fringes of cities—they are called “Ants”. Unlike some scholars who blame the “Ants” problem on market frictions or barriers, this thesis indicates the core reason is that the capability of these graduates was not recognized by employers because they could not match skilled job requirements. Lack of qualified lecturers and resources, and course programs that were out of touch with work requirements led to a quality decline in teaching as colleges expanded, so students could not learn enough skills before graduation. The thesis develops a concept of market recognition to study this phenomenon. Market recognition is the degree of recognition of some group of persons as perceived by employers in the labour market. It is a competitive concept. When persons try to find jobs, they always face competition. Market recognition is a reflection of workers’ capabilities in the employers’ view and determines the chance for persons to win in the competition for job vacancies. For example, a primary-educated worker cannot get a technician job when competing with a higher-educated worker because his capability is not recognized by the employer when comparing with the higher-educated worker. Many new college graduates’ lack of success in finding skilled jobs was due to their failure in competing with other experienced college-educated persons. We develop a labour market module as an extension of the computable general equilibrium (CGE) model to depict this process in history. In the module, workers are classified by six occupation types and three education levels; different types of labour compete with each other when seeking jobs; labour flows between occupations through a dynamic job vacancy chain, in which job vacancies emerge and then are filled by winners in job competition in each time; market recognition will determine who is the winner. We develop a very detailed baseline to replicate the history that the worsening situation for college graduates to find skilled jobs. In this baseline, structural changes in China’s GDP components, employment, sectoral output, consumption, imports and exports are captured as well as many macro indicators and price indices. It means our model has traced the features of China’s economic growth, which provides an accurate background for labour market transition. Inside the labour market, we inform the model of occupational and educational wage gap changes, numbers of unemployment, numbers of new school graduates and yearly “Ants” entry. Under these constraints, our labour market module draws a potential labour transition matrix for each year, in which labour flows between occupations in each education level are captured as well as changes of the market recognition of new college graduates. In the baseline of history replication, our model reveals a strong positive demand shift for college-educated labour in China since 1998, which is mainly caused by new technology requirements and the rapid expansion of highly-educated-intensive sectors. The baseline also captures the rapid increasing demand for college-educated labour, accompanied by a high unemployment rate of college graduates in these years. Taking account of historical wage adjustment and demand shifts, the baseline clearly reveals that the market recognition of college graduates experienced a continuous decline during college expansion, which explains the increasing number of “Ants” and high college graduate unemployment rates. On one side, new college graduates thought they had college degrees and deserved skilled jobs; on the other side, employers did not recognize capabilities of these graduates and would not provide them skilled jobs. As a result, more and more new college graduates had to do unskilled jobs or became unemployed. For example, the labour transition matrix tells that over 50% of new college graduates could get technician jobs and the unemployment rate of college graduates was below 8% in 1997; while in 2011, only 11% of college graduates became technicians directly and the corresponding unemployment rate was 12%. The plan of college expansion is to increase labour supply of the highly educated to meet the future demand for skilled workers, but the decline of the market recognition of college graduates made it inefficient. “Ants” are considered as a loss in effective highly educated labour supply, and a counterfactual simulation is designed to assess its effect and the corresponding cost to China’s economy. In the simulation, the market recognition of college graduates is assumed to decline less than what happened in history. The result indicates the unemployment rate of college graduates would drop sharply due to this reduced decline; the equivalent losses in effective highly educated labour supply are approximately five million persons to 2011; and the corresponding cost to the level of China’s annual GDP is above 0.3%.