An Economic Take On Youth Uncertainty and Why Last Month's Protests in India May Have Caught Popular Imagination

It is no secret that salaries of entry level jobs are stagnant for a few years now, while the costs of living as well as costs of upskilling have skyrocketed significantly during the same duration. Individuals who recently graduated or are about to graduate see no light at the end of their academic tunnel. As multiple commentators have pointed out, the way recent protests in India, against malpractice in competitive exams spread across the country indicate that it is not just about one exam but about the extreme uncertainty that next generation of knowledge workers are facing across the board.  

There are multiple factors that lead to this situation and I would like to cover only private education for now! Education is an industry of strategic importance for any society and thus the economics underlying learning, teaching and running academic institutions is supposed to be pondered a bit to ensure that it is at a reasonable price for those buying it and is also of economic value to those who are delivering it.

In the paragraphs that follow, I am using my limited understanding to corelate a few frameworks and ideas to education in India.

1. Market of lemons
2. Market failure on account of market control and information asymmetry
3. The capital intensive nature of educational

Market of Lemons:

There is a paper by George Akerloff titled 'Market for Lemons: Quality Uncertainty and the Market Mechanism" (check here )which I feel is a good framework to understand current private, higher education system in India....I will explain why I feel so....

What is market of lemons: Let me start with explaining what is market of lemons. It seems used bad cars in USA are called as lemons. The used cars in any country are significantly underpriced irrespective of their actual condition. The reason is that the person who is going to pay for a used car, has very little ability to figure out if it is in good condition or bad condition. On account of this information shortage, every used car is underpriced irrespective of their condition. Thus, in this case the pricing is not set just by demand and supply, it is also influenced by lack of market information.

The same seems to be situation of Indian students from an average college. The higher education system has flaws on account of lack of good teachers, absent facilities, uninterested students and common place degree inflation. In short, the companies who are  hiring a student who just graduated from an unknown college are like the people who are trying to buy a second hand car. They just don't have a way to figure out quality of the hires in this era of 'degree inflation' where people are accruing more and more certificates to gloss over their inefficiency and inability. The companies simply refuse to pay a premium for such candidates. The result? Only those from premium institutes like IITs, IIMs, NLU's and AIMMS find a decent initial pay, rest of the lot is struggling to prove their worth for the buck.

What is the remedy? Akerloff says the second hand car sellers should create a brand around assuring quality and also should provide guarantee to the buyers so that they have some assurance of post purchase support. Educational institutes can start with assuring additional relevant training to selected candidates that cater to companies' needs. But what is more important is that we as a society, and as society's agent, the government, is extra vigilant of the quality in education. Unless and until every institute that gets a license to operate maintains a threshold of quality, the whole job market is certain to collapse. The spiral down in quality of education, doesn't impact only the institute that is lackadaisical, it spreads across the industry. It is always difficult to judge how well a candidate has prepared himself/herself for a role that s/he is aspiring for. It is responsibility of the government with effective restrictions that those who obtained a degree actually have knowledge that is mentioned on paper. This will ensure creation of an effective 'market' rather than 'market of lemons'

Market Failure:

If there are factors in market, that cannot be easily captured by the mantra of "demand-supply determines price" and these factors have disproportionate impact on the  market, such a situation is called as market failure. For example, if a specific industry creates a lot of pollution around it, but it is not made to pay for it, that would be called as market failure on account of 'externality' (in this case pollution). 

Similarly, the educational industry has the market failure of 'information asymmetry' i.e. the students and their parents who are paying for the education, have limited means to understand the quality of day to day delivery of education. It takes years to realize whether you have been served a good deal or a bad one! 'Buyer Beware' doesn't easily apply to educational system in a straight way. And in India, where historically, the literacy rate has been low, the scale of this problem is really big. Many parents are unequipped to understand the effectiveness of the pedagogy that kids sit through during the vital years of their lives. 

Also, switching schools isn't easy. Thus moving across 'suppliers' in case of unfavorable terms, which is hallmark of an effective market are missing in case of education. This too is a factor that contributes to schools not being vigilant of their internal quality and standards.

Again, since education is vital for growth and survival of society and a nation, we all should be careful of improving the situation. Just showing up at educational institutes at various occasions, getting involved with them as a community service (I have read that in most of the developed countries, many a times it is one or more parents who take responsibility of taking a class to a picnic on a weekend) would take us long way. The culture and regulation have to go hand in hand to remedy this market failure.

Education is turning significantly capital intensive in India:

We all complain that education has turned extremely costly, but we are yet to see a school teacher roaming around in a Mercedes. Though, you might find someone in higher management to be doing so, but their income levels too are lower compared to higher management of other industries for example say finance. Then where is all the money that is getting poured into education going?

I used this metric in various contexts, but I feel it is worth a repeat here: India's share of global land is around 3% whereas its share of global human population is 18%. That means India holds 6 times (18/3)

more population compared to global average on every square kilometer of its area. And this number increases exponentially in congested cities. Thus land is rare in India. And educational institutes need big pieces of land to run. Proportion of cost of land to total cost is higher India, compared to other countries for this simple reason. Result? If any entity starts an educational institute, a significant portion of their capital goes into leasing or purchasing land and building. 

We as a society, should be very cognizant of the fact that land is exponentially more important in Indian context. We should constantly put this front and center in our democratic and political conversations. How well is the ruling dispensation planning to use land? Have they initiated policies that ease land dispute resolution? Are they initiating conversations to effectively use under-utilized land under railways, waqfs, trusts and other departments? Are they putting right controls and taxations to ensure people don't keep their lands and houses locked anticipating price appreciation. Are they putting right laws to ensure that people are not afraid to lease out lands bought through hard earned money and thus are not locking away this important capital guzzler, due to missing rule of law. We need to be very cognizant of this aspect if we want to grow as a society! Though it doesn't seem to be related , but a land that is going through dispute for last 30 years in your neighborhood, is one of the reasons of skyrocketing school fee that you pay for your kids!

Would like to conclude by just pointing out that as a society we can grow only if we ask deeper questions around unlocking economics of education. We as society can only flourish when we understand education to be an enabler of effective life, culture and happiness. We as a society can flourish only when our eyes glitter in equal measure at sight of knowledge as they do watching flashy cars (Pajero/Thar...what not), wood paneled homes and jewelry!