What Are the Trade-offs of Meritocratic College Admissions?

Laura Girresch: Welcome to Timely Topics, a podcast series from the St. Louis Fed. I’m your host Laura Girresch and today I’m speaking with Oksana Leukhina, economist and research officer here at the Federal Reserve Bank of St. Louis. Oksana, thanks for joining me here today.

Oksana Leukhina: Thank you for having me here.

Girresch: I’d like to talk about a recent research area for you and that is college admissions. Can you tell me briefly what you were trying to examine in this area and, in other words, what question or questions were you asking?

Leukhina: Well, yeah, sure. So there are almost 3,000 four-year colleges and universities in the U.S., and they differ substantially on how selective they are in admitting high school graduates. There are also about 1,500 two-year colleges, which basically have an open-door admissions policy. And what we see is that higher ranking colleges have limited capacity and tend to be selective in admitting students, and, in fact, just to give a bit of historical background before I actually get into the questions that we are after here is we see that what happened in the U.S. is that college admissions gradually became more and more meritocratic. OK so if you look back at, the late 1800s, college admission requirements were pretty much idiosyncratic and then they slowly became more uniform and more meritocratic by the mid-1900s. And prior to that date income was actually a better predictor of who went to college, but by 1960 or so it turned out that academic achievement became more important at predicting who goes to college. So compared to family income academic accomplishment became more important. So that’s kind of the historical background.

Also if you look at the actual students, you know, kids who actually go to college, you see that colleges became more and more stratified over time, again, in terms of academic merit. So back in 1960, for example, admissions were already meritocratic, but still you look back at 1960 you see that colleges didn’t differ as much in terms of their student body. So if you look at, say, average freshman SAT scores you see not as much of a difference between the top colleges and the bottom colleges as you see today. And so basically that’s kind of the historical background. For the U.S. you see that college admissions became more meritocratic and it wasn’t the case back in the day here, and it’s also not the case for other countries today.

If you look at other countries in the world, we see that many countries have less meritocratic admissions systems, and some countries actually have a relatively open higher education system. For example, in Germany any student who finishes high school can enroll in a public university program. Same thing for France, except for, there’s a special category of selective institutions in France. And also many countries actually deemphasize, aggressively deemphasize individual student merit in the name of the addressing systematic inequality. In Chile, for example, there are some affirmative action programs, in Brazil, also in China. This is kind of a long introduction, so the question is what did we gain and what did we give up by accepting more meritocracy in college admissions over time and by accepting the system where the stratification across college types is quite high. The kind of outcomes we are going to look at are measures of efficiency and inequality, as well as inter-generational persistence of income rank.

Girresch: That’s really interesting. I want to dive more into the benefits and downsides of having an admissions system based on merit, but first can you highlight what are the trade-offs between more selective and less selective schools?

Leukhina: Sure, yeah. So in the data colleges differ on how selective they are. OK, so there are some, higher ranking universities that have very high average freshman SAT score or you can also look at high school GPA, you would see the same thing. And the more selective schools also tend to spend more resources per student, including those that are spent on quality or the breadth of academic instruction. So we think of the more selective institutions as providing better learning opportunities, so you basically have access to higher quality teaching.

And from the student’s point of view higher ranking colleges allow them to be more productive at accumulating that stalk of knowledge that eventually helps them get better jobs, right? Of course, the higher-ranking universities also cost more and they also set higher academic standards. So maybe actually a little harder to pass classes there and where you may have to study a little harder to do so. We also see in the data that graduation rates are actually higher for more selective schools and post-graduation earnings are also higher, but that could be an artifact of having a more selected group of kids that attend college there.

So there are also advantages to attending two-year schools. They are, first of all, cheaper. They are also easier to get into, and on top of it all they allow for a more flexible course schedule. So if you wanted to maintain a full-time day job you could do that while taking classes in the evening.

Girresch: When you talk about efficiency gains here. What do you mean by that?

Leukhina: Suppose you have two students: one is high ability; one is low ability. And there are two type of colleges. Like, you have a high-ranking college and a low-ranking college. So the high ability student actually gets more out of going to a higher-quality college. OK? Today suppose we have a low-ability kid in a high-ranking college. So then if I take a spot away from him and give it to the high-ability student the overall gain in the stock of knowledge is going to be positive. And as a result, the overall level of income would go up.

Girresch: So then what did you find are the benefits of having an admissions system based on merit?

Leukhina: The benefits of a more meritocratic admissions is basically more efficiency, and what do I mean by that? Let me just back up a little bit and tell you how we think of student heterogeneity. So when students graduate from high school they differ along several dimensions and notably they differ on family income, they differ on academic achievement, and they differ on learning ability. And by learning ability, I mean how good they are at learning things and studying and accumulating that stock of knowledge. At the end of the day it is that stock of knowledge, or human capital as we refer to it, that helps them do well in labor markets, basically have jobs with higher salaries. So we work with a model of student decision-making and what our model is telling us is that higher learning ability students actually get more out of attending higher-ranking schools. Remember that those higher-ranking schools they are the ones that are providing higher quality instruction. Because these students are more productive learners, they take more advantage of those learning opportunities.  In a world where we have a limited number of spots in higher quality schools, we can actually increase the overall level of knowledge by assigning the higher-ability students to higher-rankings schools. In other words taking a spot from a less prepared student and giving it to a more prepared student will raise the overall level of knowledge, and as a result the overall level of income will increase as well.

Girresch: OK. That makes sense. And what about the downsides of an admission system based on merit? What are those?

Leukhina: Well one potential downside is that with more meritocracy there is concern that we would be promoting more income inequality and perhaps propagating income persistence across generations. And the premise here is that observable measures of ability such as high school GPA, for example, correlate positively with parental income, right? In the data if you look at high school GPA it’s going to positively correlate with family income. So with more emphasis put on high school performance, which happens with meritocratic admissions system, students from wealthier families would be taking those limited spots in higher-ranking universities. And to the extent that low-income students also desire those spots, those students would be worse off. So if the policy objective is to promote earnings equality or even more directly equality of access to higher-quality schools than alternative admission schemes would, perhaps, be more effective at achieving those goals. So, in fact, this is our objective in this paper that we are working on, it’s to quantify that efficiency inequality trait. In other words, we ask if we make admissions less meritocratic how much efficiency would we lose exactly and how effective would such policy be at reducing inequality?

Girresch: So I want to come back to trade-offs in inefficiency and inequality, but first could you give us a sense of which students may actually be hurt by the current meritocratic admissions system that we have in the U.S?

Leukhina: This is actually a very important question because these would be the students that welfare improving policies would target, right? So let me first say that we basically find that financial constraints and admission rules play an important role for college-related choices, such as college entry, choice of the college type, as well as graduation outcomes. So financial constraints and admissions rules severely constrain many students and especially the high learning ability/low-income students. So I would say these are the students that are mostly constrained by the current system.

So how do we know this, just to give a few more details? Again, like I already mentioned, we have a calibrated model of student-level decision-making so we can ask very hypothetical question, right? This is not a practical policy we can implement, but we can ask just for the purpose of identifying those students that are hurt the most by the current system, we can say, well, what if we remove these financial and admissions constraints? We open admissions to all schools, we increase borrowing limits, and we increase college capacity. Like I said, this is just a hypothetical diagnostics experiment. And then we ask, as a result of these changes, which students would make different choices and which students would be better off?

So what we find is that actually many students are better off after we remove those constraints and the effects are dramatic. College entry and graduation rates increase dramatically. Earnings go up by 16%, OK, so this is just to give you the magnitude of these constraints. In other words, the gains are going to be high, and who are the students that are benefitting from the removal of these constraints? Again, like I said, these medium and high-learning ability students have come from low-income families, and why does low-income figure into this? It’s not just because of the financial side of things. It’s not just because these students have a harder time paying for college. That’s not the main reason, actually.

What we see in our model is that the low-income basically hurts your admissions chances. So in practice this may show up in terms of, say, extra-curricular activities, for example. So if low-income students have to work after school or if their parents cannot afford to pay for some of these extra-curricular clubs, then those outcomes would basically translate into lower admissions chances. So with open admission and lax of borrowing, the low-income no longer matters and so these medium and high-ability students would gain access to the type of schools that they would optimally want to choose. And they would learn more, they would graduate more frequently, and they would end up with better jobs. So these are the students that should be targeted by policy interventions because they are the ones that have the most to gain.

Girresch: So back to inefficiency and inequality. How big is the trade-off here?

Leukhina: So we actually find that we have reached the point where increasing meritocracy or decreasing it a little bit does not lead to large efficiency gains or losses. So imagine an alternative system where instead of having colleges make their best guess about, student learning abilities, suppose that colleges would accurately observe their abilities. Suppose they see a student and they know exactly how good they are at learning. So in this case, the high-ability students would be given priority and they would move first and they would make their college selection choices, and still keep in mind that college capacities are still fixed, OK? So basically there are limited spots in high-quality schools.

This kind of thought experiment is extremely effective at giving access to better schools for above-average ability students that come from low-income families. And remember these are the students that are most constrained under the current system as we clarified in our previous question. Basically what happens as a result of this alternative system is some of these high-quality college spots are taken from high-income/medium-ability students and given to high-ability/low-income students, right? Because income no longer matters in admissions in this alternative scheme. But surprisingly, the efficiency gained is small: We find that the average level of earnings goes up by only 1.5% and I consider that a pretty small effect. So earnings inequality rises as expected, but the college entry graduation rates don’t change much either.

Then the question is why are we finding the efficiency gain to be so small and what does this mean? So remember what I explained earlier about efficiency gains. So efficiency gain has to come from the fact that high-ability students get more out of high-quality schools so taking a spot from a medium-ability student and giving that spot to a high-ability student should raise the amount of learning that happens in college. So the reason why we find that gain is small in this case is the medium and high-ability students all benefit a lot from going to better schools. That’s when a top college spot is taken from a medium-ability student and given to a high-ability student, the overall gain in the stock of knowledge turns out to be pretty small. So this is not to say, though, that the effect is small on all groups of students. In fact, the effects are quite large. Again, with those above-average ability students from low-income families benefitting the most from such an admission system, and the high-income/medium-ability students losing out the most.

So the way I interpret these findings is that access to college types can be used as an effective tool for the purpose of fighting inequality. We find that efficiency losses or gains, depending on what you do with the admissions system, they are not that large, which means that we can use the admissions system as a tool for whatever policy we have in mind that has to do with maybe fighting inequality or trying to weaken income rank persistence across generations. So we can use admissions as an effective tool for accomplishing those policy objectives without important consequences in way of efficiency losses. So that’s kind of my interpretation of this result so I take it to be a positive.

Girresch: Those are really impactful take-aways. So do you think we should change the ways we do college admissions in the U.S.?

Leukhina: Well, so what is clear from my research is that those above-average ability students from low-income families are still suffering from lack of access to better schools. So this is, one clear finding that is coming out of my research so getting those students to better colleges would not only generate efficiency gains, but it would also promote equality of opportunity, right? So how do we get them to get that access? That’s kind of a big question and, I mean, one thing we could try to do is maybe de-emphasize measures such as extra-curricular activities for which parental income may matter. So that may help.

Our findings also suggest that improving the quality of lower-ranking universities is critical. So remember that hypothetical experiment we did where we increased college capacity and introduced open admissions and everyone benefitted from that policy. It’s not a practical policy, but it just suggests that capacity constraints and admissions constraints are really limiting for a lot of students. So if as a society, we could invest more resources into instructional expenditures in public universities in lower-ranking universities, such as directional schools, for example. The directional schools usually rank lower if you compare, flagship universities and you have state schools and then you have these directional schools. So we could increase instructional expenditures in those schools that would potentially provide better learning opportunities to those students that for some reason are barred from higher ranking universities. So I think that that would also be helpful.

Girresch: That’s really interesting. Do you plan to continue research in this area? What’s next?

Leukhina: Well definitely. I’m really excited about this project and I have a really nice model, which works really well at this point. The next step is to be more specific about the efficient outcome, what exactly what kind of allocation we should be striving to achieve and studying more specific policies. So you raise that question about how should we change college admissions policies, we can have a deeper dive into those type of questions and consider not just admissions policies, but other college related policies such as, perhaps, in the face of limited spots in good universities, what should we do? I mean, what should we do to get as close as possible to the efficient allocation.  We want to examine specific policies that would, that would attempt to get us there, some policies that come to mind would be, merit-based scholarships, things like that, perhaps having to maintain a certain college GPA in order to continue attending a university, so things like that. But, you know, getting closer to more specific policy recommendations that is something on our list of things to do.

Girresch: Great. Well, I look forward to seeing what comes next, and hopefully having you back on the series. So thanks for spending the time talking to us.

Leukhina: Of course, it’s been my pleasure. Thank you for having me.

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