College admissions this year have been positively nightmarish. Acceptance rates are way down. Was this just an unusually bad year, or a sign of worse things to come?

Resident Scholar Kevin A. Hassett

The horror stories are everywhere. According to the Washington Post, one of the top students at Thomas Jefferson High School, a math-and-science magnet school in Alexandria, Virginia, was rejected by Yale University despite being the child of a Yale alumnus.

Thomas Jefferson is one of the best high schools in the country. Its students are regularly selected as National Merit Semifinalists; an astonishing 167 were so named in the most recent round of selections. It sends 20 percent to 25 percent of its graduates to Ivy League colleges. When that school's best have trouble, it's a sign that things have changed, a lot.

Another sign is apparent in the raw data. Yale accepted only 8.6 percent of applicants this year, down from 9.7 percent last year. Other schools surveyed by the Post, ranging from the Ivy Leaguers to public universities, have admitted a much smaller percentage of applicants this year.

Valedictorian? Not Impressed

Having good grades and test scores, it seems, may no longer be enough to secure a slot at a top university. Harvard University, for example, rejected more than 80 percent of the valedictorians who applied last fall.

What gives? The simple math of the story is that applications are up, and spaces are fixed. The harder part is understanding why the applications are up.

That is where economics come in. Applications are up because the costs and benefits of applying have changed.

First the costs. When I applied to school back in the dark ages, it was an exhausting and expensive process. Each school had a different application with different essay questions. It took days to finish each one.

Today, many schools accept a standardized application. It's easy to bomb the planet with applications, and it's getting even easier as more and more colleges waive application fees for online and standardized applications.

Education's Payoff

But it can't just be ease of application that explains the change. The quality of applicants must be increasing as well, otherwise the Thomas Jefferson students would still be golden.

An important new research paper by economist Thomas Lemieux of the University of British Columbia has documented that there has been a dramatic increase in the rate of return to post- secondary education in the United States. Lemieux finds that most of the increase in wage inequality in the U.S. is accounted for by a sharp increase in the wages of highly educated individuals.

And the returns skyrocket as you get more education. Lemieux writes that "the wage gap between college post-graduates and college graduates has increased more than the wage gap between college graduates and high school graduates, which has itself increased more than the wage gap between high school graduates and high school dropouts."

Kids (and parents) are smart enough to recognize this. The benefits of being an academic star are increasing, so more and more students are trying to become one. That makes it harder to get into college but increases the quality of each year's senior class.

Global Economy

Why have the returns to education increased so much? My own best guess is globalization. The U.S. continues to have a tremendous comparative advantage in post-secondary education. While low-skilled workers face intense global competition, high- skilled U.S. workers can still demand a premium relative to skilled workers from other countries.

Indeed, globalization can significantly increase the returns to the highly skilled. Now, a smart manager with a good Internet connection in the U.S. can coordinate production activities in many different countries at once. A really smart manager can figure out how to locate his production chain all across the globe, lowering his costs and increasing his own income.

This is the flip side of the globalization debate. If folks with the highest skills do much better in a global economy, then kids invest in acquiring those skills.

Worse Times Ahead

College admission will likely get more difficult, especially at the most competitive schools. Those who have the highest training will be the last to be confronted with wage pressures from globalization, and their incomes will continue to outperform those with less education. These patterns will be apparent to all, and provide even stronger motivation for high school graduates aspiring to academic stardom.

Another factor will make it worse. If kids with perfect records have a hard time getting into top schools, high school teachers will face increasing pressure to inflate the grades of their better students. The top 20 percent of a typical graduating class will have near-perfect grades, and the universities will have a hard time telling who's who.

When today's second grader applies to college 10 years from now, admissions directors will regale him or her with the stories of how much easier it was to get into college back in 2006.

Kevin A. Hassett is a resident scholar and director of economic policy studies at AEI.