Monday, October 3, 2011

Competition Inflation

In some places in the U.S., especially on the coasts, the competition in schools is absolutely insane. In Manhattan, for example, moms are enrolling their toddlers in gifted kindergarten test prep classes, in hopes that their child will make it into the "best" kindergartens in the city. In Southern California, it's common that kids will make hour-long commutes every day to attend the gifted magnet school, or will start studying for the SAT their freshman year, or hire private counselors to help them craft the perfect college application. All of this is a far cry from life in Arizona, where, for the most part, pretty much no one bothers with any of that.

All this extra competition, though highly stressful, might be worth it if it produced brighter, more able, students. But in my experience that doesn't happen. Students from the coasts aren't, on average, any smarter than those from other parts of the country. Even the brightest students from the coast are no brighter than the brightest from Arizona, or any other laid-back state. They've just done a lot more work. So ultimately all this extra work seems to amount to a tax on students with ambition in highly competitive environments. Society doesn't gain, and these kids are certainly made worse off.

Why, then, does it continue? And what accounts for the discrepancy in competition between places like Arizona and places like New York, or California?

Asking these questions has led me to a fascinating synthesis between monetary and labor economics. The idea is this: labor markets, like the macro-economy in general, can also suffer from inflation. And some of the insights about inflation that we've learned from monetary economics apply to this labor version of inflation, or what I'll call "competition inflation."

In this analogy, we can think of the jobs, positions, fellowships, etc. (i.e. the total available number of positions to which we can allocate people), multiplied by its prestige factor, as representing the "real output" of the labor market. To illustrate, suppose the labor market wealth is 100. This sum could be achieved either through 100 jobs with a prestige factor of 1, or 5 jobs with a prestige factor of 20. But by this metric, in both cases the labor market has the same level of output.

One's resume is the price one pays for a position. The more prestigious the position, the more it costs, i.e. the better the resume has to be. Like money, resumes have relative, and not absolute, purchasing power; to get a good position, not only does your resume have to be good, but it has to be better than everyone else who applies for the position. This makes resumes like a nominal asset, a kind of currency in the labor economy.

Regular inflation, you'll recall, occurs when the money supply increases faster than the total value of goods and services in the economy. Similarly, competition inflation—or the phenomenon of an escalating resume-price to achieve any given position—occurs when more people have good resumes than there are positions in the labor market to support them (i.e. to draw a more complete analogy, when people's resume holdings outstrip real labor market wealth).

One direct implication of this formulation is that competition inflation isn't inevitable: as long as labor market output increases with the rate of resume improvement, then inflation should stay close to zero. Labor market output is a function of prestige, and job availability. Clearly, if there were an expanding number of prestigious positions to go around, then inflation would be low. But inflation could also be kept low if the number of not-so-prestigious positions expanded at a fast enough rate as well. The reason is that the more plentiful and easily available not-so-prestigious positions become, the less and less motivated people will be to put in the effort for the prestigious positions. That will, in turn, slow the rise of ridiculously lavished resumes.

(We can think of each person as having a tipping point at which they abandon striving for a prestigious position and settle for less, depending on the relative availability of jobs. That tipping point will be radically different for different people. Some people will only work for the prestigious job if there are no other jobs available, and some people will never work in a less-than-prestigious job; most people will fall somewhere in between. Incidentally, this tipping point may be a way of assessing people's subjective prestige valuations.)

Like regular inflation, competition inflation is something that occurs naturally from generation to generation. Baby boom Ivy Leaguers "love to talk about how they would have been turned down by the schools they attended if they were applying today," perhaps in the same way they talk about 25 cent comic books [source]. Since their time, there has in fact been several "devaluations" of the resume. Test scores used to be enough to get into a good college. But when there were too many kids with perfect test scores, admissions officers started looking to extracurriculars, and touting the benefits of the "well-rounded" students. Now they're seeing so many "well-rounded" students that the new fad is "pointy-ness"—being well-rounded plus having some achievement spike in a particular area. No doubt, within ten years the standards will shift again. Each time this shift happens, someone who builds his resume according to the old model will find that their achievements no longer mean as much.

In general, a modest amount of inflation is a good thing, and the same holds true here: as the economy becomes more complex, and as modern jobs require more and more skills, it's a good thing that our institutions push people to become more skilled. The problems come with hyperinflation, as is the case on the coasts. When resume-building ceases to represent any greater skill or talent acquisition, people start to lose faith in the currency. Employers become more skeptical, and students begin to think of the competitive process as arbitrary, or unfair, or meaningless. Having a good resume loses its respect. (Note, for example, the tone of this NYT piece).

In the face of high inflation, people switch to more durable assets. In the labor market, those durable assets are relationships, and networks. When everybody speaks three languages, and has volunteered in orphanages in Peru, employers need some way to make a decision, so professional networks do the work that resumes used to do. In highly competitive environments, then, networking becomes essential, and those people who are highly capable but without contacts lose out the most.

With inflation, there are always winners and losers. The losers are everyone in training, the young and the inexperienced. The winners are the people who already have jobs, i.e. the people who have cashed out their resumes. Someone who starts working may find that twenty years later the average resume required to achieve the same position has increased substantially. In that case, the person has experienced a capital gain; when they leave their job, they will have a job experience more valuable than what they paid for.

With this framework, we can explain some generally puzzling phenomena. For example, we see that competition inflation is most intense at the high school level, but peters out post-college, and is virtually zero for the most demanding positions. (The President's resume has remained about equally impressive on average throughout our country's 200+ years.) The reason for this is that early in our career, the relevant labor market that we face is more closed and restricted. High school students compete only within their city for the prestige positions, which they need in order to get recognized by colleges. But if the city happens to be a hotspot of ambition (because, say, all the kids' parents are investment bankers, or highly successful government officials), then the same ambitious kids will be competing against themselves—and so the resume price will be bid up. After college, however, students compete nationally, and internationally, for jobs. That spreads the ambition around and helps keep competition inflation more stable. Imagine, for example, if Harvard kids were only allowed to get jobs in Boston: competition inflation would be through the roof!

Of course, the major, elephant-in-the-room difference between monetary and competition inflation is that the latter has no central authority that issues currency from the outside: there is no Federal Reserve of Resumes. Instead, resume creation is a highly decentralized process that depends mostly on people's ambitions. However, there are several smaller authorities that set resume standards. For example, ETS, the company that administers the SAT, could increase the value of a perfect score by making the test harder. At an extreme, passing high school (or university) could be made a very difficult, demanding task. These measures would be equivalent to cutting the supply of currency in the labor market, and would curb inflationary pressures. But this solution would be very temporary. Soon enough, there will be enough people mastering the new standard that it will have to be set higher still. (There's also a question of what would happen to the kids who DGAF, and will just stop trying when the standards are raised. It's a question I'll have to explore some other time.)

Is there any resolution to the problem? Ultimately, it seems that controlling resume creation will have no long term effects, since there are enough ambitious kids willing to do whatever it takes. That means the only option is to expand the number of positions available—we need more places for these ambitious high school kids to go. But that won't happen unless there is some miraculous boom in job-creation in this country, or a number of good universities suddenly open up, or ambitious students suddenly gain another route to prestigious position besides college. None of these seems particularly likely.

Update (October 7, 2011):  One important implication of this framework, which I didn't mention earlier, is the presence of an inflation tax. In the normal economy, inflation works like a tax. Suppose the government needs to spend an extra $100 million dollars. Then it can raise that money either by collecting it in taxes, or by just printing it. The latter spares the government the hassle of dealing with angry taxpayers, and makes everyone feel richer, but it still costs them in the end: by printing enough money, the government makes each dollar have less purchasing power, which in effect takes a cut of real wealth away from people proportional to the amount of money they hold.

The labor-resume economy has the same phenomenon. Suppose that the government wants to boost the employment opportunities that people enjoy. It can do so by making it easier to graduate high school and college. In the short run, people will find better jobs. But in the long run, if graduation becomes too easy, the value of the degree will just become worth less, and you end up with situations like this:
“I was in a taxicab a couple days ago, and this is a story that really exemplifies how the economy is changing.  Over the two-way radio, the dispatcher’s voice comes, and he says, ‘Gentlemen, I’m looking for someone to pick up one extra shift on the night shift, a new taxicab driver.  If you know someone, they need to have experience.  And I also need a college education.’  And I thought to myself, ‘If you need a college education to drive a cab in this country, what job don’t you need to have a college education for?’" [from this Freakonomics podcast]
Update (October 13, 2011): Caveat: Thinking of a resume as currency only makes sense when we think of it as a homogeneous product. In actuality, though, what happens is that experience that some employers value applicants experience differently, depending on how it matches with the skills necessary for the job for which they are applying (e.g. as an extreme example, having 10 years of solid experience in engineering will not help you get a Broadway gig).

There are some ways to work around this. For one, we could focus on just (near) universally valued qualifications, like college graduation. Alternatively, we could focus on what happens within specific industries, where all applicants are competing on the same resume, and where it is easier to make apples-to-apples comparisons on qualifications. Either of these would do the trick to preserve the integrity of the analysis.

As one of my professors pointed out, models aren't meant to explain everything at once. So naturally this one can't either.

Update #3 (October 15, 2011): More evidence for my thesis, from this NYT article:
Moulshri Mohan was an excellent student at one of the top private high schools in New Delhi. When she applied to colleges, she received scholarship offers of $20,000 from Dartmouth and $15,000 from Smith. Her pile of acceptance letters would have made any ambitious teenager smile: Cornell, Bryn Mawr, Duke, Wesleyan, Barnard and the University of Virginia.

But because of her 93.5 percent cumulative score on her final high school examinations, which are the sole criteria for admission to most colleges here, Ms. Mohan was rejected by the top colleges at Delhi University, better known as D.U., her family’s first choice and one of India’s top schools.
Ms. Mohan, 18, is now one of a surging number of Indian students attending American colleges and universities, as competition in India has grown formidable, even for the best students. With about half of India’s 1.2 billion people under the age of 25, and with the ranks of the middle class swelling, the country’s handful of highly selective universities are overwhelmed.

This summer, Delhi University issued cutoff scores at its top colleges that reached a near-impossible 100 percent in some cases. The Indian Institutes of Technology, which are spread across the country, have an acceptance rate of less than 2 percent — and that is only from a pool of roughly 500,000 who qualify to take the entrance exam, a feat that requires two years of specialized coaching after school.
The problem is clear,” said Kapil Sibal, the government minister overseeing education in India, who studied law at Harvard. “There is a demand and supply issue. You don’t have enough quality institutions, and there are enough quality young people who want to go to only quality institutions.”

1 comment:

  1. Well thought out, Kunal. Library school blogs have been talking about this lately, and wondering about how much the MLS means these days. I have to say, about the beginning of your post, I don't think that obsessive kindergarten prep is anything short of absurd, but when I went to camp with kids from New York, I was constantly impressed with not just how much more educated they were, but how much more natural and "cool" it was to be so. I don't think it's ever a bad thing to have 16 year olds be well read.

    I'm not really sure how else to respond to the real topic of your post in the same way that I wasn't sure how to respond to a similar post on Hack Library School. Certainly things could be alleviated, but all the ways it could be done (like the ones you suggested and others) won't happen. I do wonder where it will leave us, and where it will plateau. Have you noticed how boring the last few Olympics have been? I remember at the last summer Olympics, the commentators were talking about how people's swimming times were becoming next to inhuman, and they weren't sure what that would mean for the future. People are just getting too good at stuff. But the swimming, at least, is clearly a marker of actually being superhuman good, whereas the resume thing means less and less. I suppose it's possible that it will even out because anyone who is not American royalty will have to work at McDonalds (or go to Portland, where you can be a barista with a Master's), or it will plateau and favors and networks will cease to matter, and then real qualities will again....?