Used Cars, Lemons, and Higher Education
Let's say you are about to buy a used car and you don't know much about cars, but you know you are willing to spend a maximum of $10,000. You would be willing to spend less, but you really just want the best car you can for less than 10K. Let's also say, that despite your lack of knowledge, you talked to your friends and they tell you that half the cars on the market are worth about $5,000 dollars (i.e. fairly crappy), but the other half are actually worth $10,000. So you go into the dealership thinking to spend about $7,500 on a used car. Meanwhile, at the dealership the dealer is looking through his inventory and decides he cannot make ends meet if he sells any car for less than $7,000.
You walk into the dealership, ask if they have any cars around $7,500, and you eventually reach a deal because the dealer is willing to sell and you are willing to buy (you get an old Camry for $7,325, because those things never break down).
Years later there is a massive flood in the area, and many cars are severely screwed up by it. Broken transmissions, broken engines, messed up upholstery -- basically they are worthless.
Despite this, used car dealers buy up these pieces of junk from grateful owners at bargain basement prices. The dealers think they have hit the jackpot because they can sell these "lemons" for the same price as other used cars of similar models and mileage. This works for a while, until the local news station gets a hold of it, and tells everybody that "lemons" now comprise about 10% of the market and are absolutely worthless (i.e. $0) because they constantly need to undergo repairs.
After all this drama, your friend is considering buying a car, and she too has a max limit of $10,000 to spend, but this time 45% of the cars are actually worth 10K, 45% are worth 5K, and the other 10% are worthless. Zip. Zilch. Efes. Nada. So she decides that a reasonable amount to actually spend is $6,750 (= 0.45(10,000+5,000) + 0.1*0. Yay math!). Again, the dealer cannot sell for less than $7,000, so even though she wants a car and he wants to sell, they cannot come to an agreement. She leaves without a car, and ends up commuting for three hours every day on the bus. The dealer is even less lucky. He loses his job, gets divorced from his wife, and ends up living in a van by the river.
How could your friend and the dealer have avoided this disaster? Also, what does this have to do with higher education?
Be patient, I am getting there.
To avoid her awful commute, your friend could have hired a mechanic to look over the car and give her an estimate of its actual value, but there are two problems with that. The first is that unless your friend is open to alternative forms of payment, doing this will raise her transaction costs. And that, by itself, could lead to a car-less impasse. The second is that the dealer will tend to lose out. If customers have perfect knowledge of the value of the car he stands to lose profit, and I cannot imagine many dealers willing to allow mechanics to look over their cars before a purchase, especially if they are being payed by the customer to deliver a low estimate.
Another option, is that she could have gone to a reputable site, such as carfax.com, to get the accident and repair history of the car in question. These sites are not perfect, and do not deliver all the relevant information on the value of the car, but they can definitely reduce the risk of getting a "lemon", which benefits both the consumer and the dealer, as he can actually make a deal, and brag about his business acumen to his wife (who, let's face it, will probably divorce him anyways).
Companies hiring employees straight out of college (or grad. school) are much like used car buyers. They know that some of the people coming out of college will be very valuable to their company, and others less so. If, generally speaking, most college graduates are workforce ready, then businesses and college grads can come to some agreement about wages that won't leave twenty-somethings out sleeping on park benches, and cubicles empty at [Jewish Name], [Jewish Name], & associates.
However, if there are even a smallish percentage of "lemons", college grads. with no appreciable skills whatsoever, this arrangement can break down. Employers are afraid of hiring anyone without proven experience because of the possibility of hiring a "lemon", and recent grads., even ones who are competent, cannot get a job, unless they are willing to eat nothing but ramen for three or four years.
So how can employers solve this?
Well one way is to offer long internships, in which businesses take in a bunch of prospective employees and check under their hoods to make sure they haven't suffered severe water damage (to extend the metaphor way past its breaking point). However, interns are not cheap (well not THAT cheap), and it would be easier if they could just get the right employee to begin with.
Another way companies can solve this issue is by looking at where their employees graduated from. They know that some institutions tend to produce fewer "lemons" than others, so they can choose to hire grads from those institutions over others.
Unfortunately, this whole system really screws over the students, especially the competent ones that don't want to spend a fortune on education. The good universities know that they are good, and know that they can charge obscene amounts for tuition that students will have to pay if they want to get a job. It is especially unfair to economically disadvantaged (can we just say poor) students that are just as competent as the wealthier students, because they are left the choice of being in immense debt for much of their lives, or lowering their lifelong earning potential.
The system is broken. There are suggestions to fix it, but I have written enough already. RANT OVER.
