Bill Kerr: When hiring workers, many employers now demand a college degree for positions that didn't ask for one in the past. Even jobs like telemarketer and warehouse supervisor can now require a four year college degree. Harvard Business School's Joe Fuller.

Joe Fuller: We found it particularly surprising that a number of occupations which have very, very low levels of college degree holders currently occupying the job suddenly require college degrees to apply.

Kerr: The phenomenon known as degree inflation makes it harder for companies to find suitable talent. Fuller recently released a report on the degree inflation problem and its unintended consequences for companies.

Fuller: We found that employers pay often significantly more for a college degree holder to do the exact same work as a non-degree holder, and that's a big driver of cost.

Kerr: Degree inflation also hurts workers. It blocks them from entering a wide range of fields from administrative support to sales and currently threatens 6 million jobs.

Fuller: That's 6 million doors slamming for people that don't have college degrees in terms of their access to a good-paying job that will support a middle class lifestyle.

Kerr: Welcome to Harvard Business School's podcast on Managing the Future of Work. I'm Professor Bill Kerr, and I'm pleased to be joined by my colleague and visiting fellow at the American Enterprise Institute, Professor Joe Fuller. We'll discuss his report, “Dismissed by Degrees: How degree inflation is undermining U.S. competitiveness and hurting America's middle class.” Welcome, Joe.

Fuller: Thanks Bill.

Kerr: Joe, what is degree inflation?

Fuller: Degree inflation is the tendency of companies to raise the academic requirements that they impose on job applicants, and specifically, the tendency of companies to start requiring a college degree be held by a job applicant for jobs that have not historically had such a requirement.

Kerr: So what's the change that we're talking about? 5 percent greater, 10 percent greater requirements?

Fuller: No, it's much larger in many instances. For example, if you look at the job of a supervisor for production workers, less than 20 percent of those incumbents who hold that job today currently have a college degree, but 70 percent of job postings stipulate the job applicant must have one. And we see that same pattern in supervisory jobs, for food service workers, for office administrative staff, and even for executive secretaries.

Kerr: So it seems a pretty widespread problem.

Fuller: Yes, and it cuts across industries and regions.

Kerr: What impact does this problem then have?

Fuller: Well, it's got two impacts. The first and most important impact is that it makes it harder for people with work experience and with a relevant background to do a job to be considered for a position. It freezes out the two-thirds of Americans that don't have a college degree. There's also an insidious problem, which is less easily detected, but it really has a negative consequence for many employers, the very people who are raising the requirements. For example, it raises the wages they pay. In our survey, we found that employers pay often significantly more for a college degree holder to do the exact same work as a non-degree holder. And similarly, we found that degree holders turn over at a faster rate than non-degree holders. They leave the job they took, and that's a big driver of costs for employers.

Kerr: And these same employers did not find a productivity advantage while they had the worker.

Fuller: This is a really important point. With the exception of a couple of instances, specifically financial services and professional services, employers that have a population of workers where some workers have a college degree and other workers don't generally reported that the productivity of the two pools of workers was the same. And that was the dominant answer, in some instances, that the non-degree workers were actually more productive. So about two-thirds of the time, across multiple job classifications, multiple industries nationwide, employers credited non-degree holding workers were being equally productive as degree holding workers or more productive, which suggests that you're paying more and not getting a whole lot more for it.

Kerr: Doesn't seem [to be] a winning proposition.

Fuller: It isn't.

Kerr: Okay, so we have both society-level implications and also business implications.

Fuller: Absolutely.

Kerr: Let's go back to just starting with the individual. Let's say I'm an experienced production supervisor and I don't have a college degree, and I'm looking to change employers. How would this impact me?

Fuller: It would greatly reduce the number of employers that would even consider your resume. So in many, many companies now use automated devices, artificial intelligence to scan resumes, and if you tell that scanner, "Only give me candidates that have a BS or a BA on their resume," they'll kick your resume out of that queue without any further consideration, despite the fact that you have the relevant background and experience probably to do the job.

Kerr: So even though we're trying to credit technologies becoming smarter, you're saying in this case it actually is pushing out the people that we most might want to see as an employer.

Fuller: Absolutely. And it also has the effect of biasing the employer to only look at certain subpopulations. Another insidious effect of this is while 33 percent of Americans have college degrees, only 15 percent of African Americans have college degrees, and only 14 percent of Hispanic Americans have college degrees. So every time you raise this requirement, you have systems effects that affect the candidate pool and the outcome for individual applicants. And both can be negative not only for the applicant but for the employer.

Kerr: Okay. So going back to the employer, why would this bad practice exist? What is it that they're not capturing?

Fuller: Yeah. Well, I think there are a couple of considerations. First of all, why are employers doing this in the first place? Our research indicates that employers are using a college degree as a proxy for a number of characteristics they're seeking from workers. For example, they use it as a proxy for the capacity to learn. They also use it as a proxy for what are known as soft skills or professional skills, the ability to thrive in [a] workplace. Anything from workplace etiquette, being punctual, how you act in a meeting, to the capacity to interact successfully with strangers, people you've never met whether they're coworkers or customers. And employers have complained that they find it harder and harder to find candidates for jobs that don't have degrees, who have the relevant level of soft skills to thrive in their workplaces. They've therefore default to a college degree holder and crowd out the rest of the population.

Kerr: So it sounds like they're substituting credentials for skills that they would like to measure. And is that employer laziness? Is it that they can't find information about the skills? What leads them to make that substitution?

Fuller: I think the first is that when an employer finds it difficult to fill a job, they naturally gravitate to new populations, and there's a second important truth here, that a lot of the jobs involved are getting somewhat more complex. So the ability to rationalize, “maybe we need to go to a more talented, more credentialed population,” is raised. Finally, I think that once an employer makes the shift and actually succeeds in hiring some college graduates into a position, they essentially close the door on reverting to their old policies and it becomes baked into the system that this is a college level job. And the logic for why it is a college level job and the tendency to revisit whether or not that was a good choice is set aside, and then you ended up with a self-fulfilling prophecy.

Kerr: Now I would imagine in organizations there would be some red lights that would be flashing saying, "Uh oh, we've got a problem here." Why aren't they finding these kinds of signals?

Fuller: Yeah. Well I think there are a couple of reasons. The first is that very often the consequences of degree inflation are not actually experienced by the people who set hiring policies and [are] administering the hiring process. So let's take the example of turnover. I said earlier that many people being hired into these jobs that have historically not required a college degree, but who have a college degree, leave voluntarily at a much higher rate than their predecessors. That isn't really captured by the hiring department or the HR department. That's experienced from the shop floor, by the operators of the business. And many of these system effects and the associated costs are actually hidden from the people who are setting personnel policies, so they don't see the consequences.

Kerr: And your research shows that part of this got triggered in the recession, I believe, when college graduates were more available.

Fuller: Yes, but it actually accelerated during the recovery. So it's a little bit of a contra-logical outcome, but it started in 2008, 2009 when many, many young people, aspiring workers just wanted to get a job and many better jobs were not available to them. But through 2010, 2011, 2012, as the economy started to strengthen, the tendency continued. Now, part of that is a reflection of the fact that throughout that period some jobs did get more demanding and more technical, but we think a big part of it is that employers just got used to pulling that lever and starting to change the degree requirement, and then not revisiting the logic once the market tightened.

Kerr: Okay. As you've gone and looked at the companies that are addressing this problem, what are some of the best practices you've seen for overcoming the degree inflation?

Fuller: Well, the first is to revisit the fundamental question of why do we think this job requires a college degree. What is it about the work that we think now requires a college degree? Have we fallen into kind of a lazy man's trap of just saying, "Well, we've got some college graduates who took the job, so it's obvious there's a market for college graduates to take those jobs. So why don't we just require it? Isn't that generically a good thing?" There are a couple of examples of companies in our research that we think give a window on what sorts of practices companies want to consider. One is LifePoint Health, which is a hospital chain. They found that in different regional districts of their company they had different levels of degree requirements for certain jobs. So in some regions, they were hiring non-college grads for a job and other regions they were requiring college grads, and they're getting the same level of performance. So they revisited what was the logic of requiring a college degree and started resetting those qualifications.

Kerr: And was most of the resetting downwards to not requiring a college degree?

Fuller: Yes. And that's also important for them because they serve a lot of rural communities where the percentage of the workforce that have a college degree is lower than urban communities. So they had that type of growing mismatch between supply and their demand that I'm anticipating we're going to see with other employers as the economy continues to strengthen. Another example is Hasbro, the toy company. What they did was they took a college level job in marketing managers and they found that job had pretty high turnover. And as they investigated why, they found out that while the higher value added elements that were very satisfying to their workers, but they had to do a lot of very basic market analysis and very repetitive work that their higher skilled workers didn't find very motivating and over time they became bored with and started to think about leaving the company. So they reconstituted the job, decomposing it, and created a non-college level market analyst job, who supports that marketing manager, [which] improved retention of their marketing managers, created more leverage for them, and created a whole new job classification that's accessible to non-college graduates.

Kerr: Successfully thinking about how the organization should be designed and the work divided up.

Fuller: Yes.

Kerr: You've more broadly called this “talent pipelines” and the development of that. Say a little bit more about talent pipelines.

Fuller: Well, if you look at the way people hire workers, it's basically been unchanged for the last 50 years. Our parents would readily recognize the way you send in a resume. You do it electronically now, not through the US mail, and there's a job interview, and your credentials are checked. And then you get the job or you don't. But in virtually every other way companies source important inputs there's been a revolution. So the professionalization of procurement, the management of suppliers, the entire total cost of quality and quality management movement has revolutionized the effectiveness of companies. But somehow that hasn't bled into the practice of hiring people. Now, we don't want to confuse people with ball bearings or widgets, but we believe that applying supply chain management principles to sourcing talent is a way that companies can greatly improve the effectiveness of their hiring and the productivity of their workforce. And that requires applying the exact same logic that companies apply in their supply chain management functions to people. Create preferred suppliers that you work with closely to specify what you're looking for, and you're in active engagement with them, telling them when the people there forwarding on for your consideration aren't meeting what you need, telling them when you've got changing needs in your workforce, so that those educators or workforce intermediaries have an opportunity to invest in the types of programs and education that will allow them to provide that employer with a credible, qualified worker.

Kerr: You closely looked at State Street Bank and talked about some of the nonprofits and community groups they worked with. Tell us about State Street.

Fuller: State Street is a Boston based major bank, and what State Street did was, looking at their workforce, they were unhappy with a level of diversity in the intra-level workforce. And they were closely with a Boston headquartered not for profit called Year Up, which has become the largest not for profit in the United States in terms of providing fundamental training for aspiring workers, usually with a high school degree, to get entry level jobs in companies. And what Year Up does is put young people through a very focused educational experience, some people would call it a boot camp, where they're both learning hard skills, for example, the skills to be a Microsoft certified IT help desk person, but also those critical soft skills I talked about earlier, things like, what's it like to go to a meeting, what is appropriate workplace etiquette, from everything from what to wear to work to punctuality to how you conduct yourself. And they then work with employers who have agreed to take on Year Up grads in apprenticeship type settings. So it's not technically [an] apprenticeship program, but a workplace learning environment, and many employers then go on to hire those people full time. So what State Street did was become the first and biggest client of Year Up and this has allowed them to bring opportunity to youth, young people of color, into their organization with the background and the training to have a good chance to be a success and become part of the professional development and career path development program of State Street.

Kerr: And some of those have risen all the way up to become vice presidents.

Fuller: Yes. It's a very exciting outcome. Year Up started really focusing on things like IT support, but now they're branching into other fields from basic accounting to customer service and diversifying the types of employers they're serving as well.

Kerr: Year Up helps prepare workers for firms. There's also the opportunity for firms to internally train. If I'm a firm and I make that investment, what happens to my workers if they get poached by somebody else? Or how does that affect my economics?

Fuller: Yes. Well, this is a particular concern of many, many employers, but I think my first response to that is, well, if you invest in a worker and their first impulse is, "How do I get the heck out of here?" you probably have a problem that goes beyond your training regime. You probably have a compensation problem or a corporate culture problem. I like to say to my students sometimes, "People don't quit companies. They quit bosses," and that's the first question I'd ask. But if you look at a company like-

Kerr: Sometimes they quit professors too.

Fuller: Right! That's why there are shopping periods in classes! But in any case, if you look at a company like CVS, which has a quarter of a million employees, very, very active in terms of not only providing training opportunities, but also providing their workers with decent navigational tools to know what training is available and what type of training might be consistent with them getting themselves qualified for consideration for promotion. And their philosophy, and I think increasing number of progressive employers’ philosophies, are “we have to take the human asset base we've got now and do what we can both to make them more productive while they're here, but also to demonstrate that we're investing in those workers' success.” And particularly for middle skills workers, workers that don't have that college degree, there's a clear correlation between those workers believing that their employer is committed to helping them keep a job or get a better job inside their company and retention. I think it's a bit of a straw horse that companies get concerned about this, but in fact, the data doesn't really bear out that it should be so much of a concern and the concern may be misplaced.

Kerr:And it could be a positive attribute for employee retention, employee engagement.

Fuller: Absolutely.

Kerr:What competitive advantage can a company gain by better practices in this area?

Fuller: Well, several. Our research shows that workers that feel that level of commitment, and particularly workers without a college degree, show a higher level of engagement in their job, according to their bosses. So that they're more dedicated to their work, they're less likely to turnover, as I said earlier. They actually have lower, more realistic expectations about the pace of their compensation growth or their career trajectory. So you get a happier worker often for a more reasonable wage who's less likely to turnover and more engaged and committed to your company. That's like a trifecta of improvements in employment practices and outcomes.

Kerr: So is it just awareness that gets in the way, or is there something else that we have to worry about?

Fuller: Well, I think there's several considerations that tend to prevent companies from asking the right questions. The first I touched on earlier, which is they don't actually see the all-in economics of their current system. In the quality movement this would be called the cost of quality. They don't understand that their current system actually triggers a process that leads to higher turnover, and they don't capture those economics when they're evaluating alternative approaches. So doing the math right and doing it more expansively and including all the relevant variables is an important step forward, and the failure to do that gets in the way. The second is companies have over time fallen into a habit of relying on the spot market for labor. Part of it is online job postings. We're suddenly rather than getting 50 respondents to a want ad you put in a newspaper 30 years ago, you get 2000 respondents overnight. And this caused employers to get a slightly distorted view where the real expectation is we should be able to post a job requirement and get qualified applicants almost overnight. And if all your policies and practices around hiring are basically designed around that logic, the notion that you're going to have a more stepwise, curated approach, you're going to invest in partnerships with local educational institutions, you're going to provide docents or technology or tooling for people to work on, you're going to have paid internships, or you're going to develop an apprenticeship program whether it's federally registered or not ... All those considerations get kind of set aside without consideration because their whole system is geared towards this real-time spot market logic. As that spot market dries up, gets more expensive, you can see in multiple job classifications now 40, 45, 50 day periods where jobs are open when the norm would be in the low 30s. People may say, "Well, what's another 10 days?" It's a lot. So we think that employers are going to have a pretty compelling logic for revisiting this, and we hope we're giving them some of the insights into how to go about that.

Kerr: Okay. So moving from a transactional spot market perspective into one of a longer term engagement, in particular, do you find someone that is not at that college degree level but really values the job,that can be a particularly valuable relationship to develop?

Fuller: Yes. And another one I want to point out is about continuing training for incumbent workers. For a middle skills position, the number one reason for failed hires, someone who you hire but didn't work out, is a soft skills deficit. As you think about it, that kind of makes sense because it's much easier to verify whether someone's got those hard, technical professional skills. Can they actually figure out why a laptop won't print to that computer or why it crashed or can they replace the screen with a keyboard easily? You can test for that. But it's hard to know how people are going to react when they get their first negative performance review or when they're asked to do something that's unfamiliar to them and are they going to know when to ask questions. But if you take an incumbent worker and ask, "If we provided this person with more jobs, could they fill a more complicated, perhaps better paying, job that we have open?" You're making that judgment based on a personnel file. You've worked with that person. You've got performance reviews. You know that they play on the company softball team. They showed up at work the day of the blizzard. They always roll over the maximum number of sick days because the only times they've taken a sick day is when their boss asked them to go home because they're obviously in distress You know that they fit in. You know they [have] shown commitment. You know they know how to get to work on time, and you're not guessing. And so very often a better tradeoff is to that incumbent worker who you know well and invest behind their growth as opposed to capping what they can do and taking a chance on somebody from the spot market.

Kerr: So it seems like almost everybody can win from handling this degree inflation problem. What can educators or policy makers do in this space?

Fuller: Well, I think for educators there's a real challenge, which is that educators often don't have both access to the right type of information about what types of jobs are being sought and what skills are required to do them, nor do they have sufficiently active engagement with local employers. So it's as if they're trying to create a product with a very vague definition of what the market wants. For the vast majority of the education system, especially at the community college level and in high school districts that are in geographies where there are maybe tougher labor markets, finding ways to engage with employers, particularly finding ways to set up work based learning opportunities for students so they can get exposed to work, they can get training not offered by the educator but in the four walls of the perspective employer as part of their degree completion or as part of getting their high school degree, innovations like that are areas where educators can really make a leap forward using proven methodologies. And I think for policy makers, enabling that and encouraging employers to embrace opportunities like that and cultivate those talent management pipelines would be a very, very important step forward.

Kerr: So it sounds like we all have a lot of new ways that we can manage our talent better in the future.

Fuller: I think so.

Kerr: We appreciate Joe Fuller joining us today to talk about the pitfalls of degree inflation. We have just scratched the surface of his report, dismissed by degrees, in this podcast. Visit Harvard Business School's website on Managing the Future of Work to see the full report. Thank you for listening in, and thank you, Joe!

Fuller: Thank you, Bill!