Last week a federal district court upheld the U.S. Department of Education’s Gainful Employment regulation. The regulation holds some ‘career oriented’ college programs responsible for the amount of money their graduates make as a percentage of the debt they have taken on. There is a similar and growing interest among governors and state legislators for holding public colleges responsible for the earnings and employment of their graduates.

According to the National Conference of State Legislators, 30 states now have policies that connect some state funding to the performance of public colleges. Typically, the focus of the metrics in these performance-based funding formulas is student progression and success particularly for underserved populations. But now more and more states are considering adding graduate’s wages and employment to these formulas.

Emerging from the recession, states have been increasingly focused on the economic benefits of the money they invest in their higher education systems. This makes sense. Schools should not do such a poor job of educating students that they are left unable to support themselves or to pay off their debt. This even applies to four-year colleges. While employment is not the only positive outcome from a four-year degree, it is a necessary one.

Six states (AR, FL, LA, MN, TN, and TX) currently include labor market results, like wages and employment status, in their outcomes based funding formulas. Two states, Minnesota and Florida, apply these metrics to both their four-year and two-year public colleges. The other four states apply them to only technical or community colleges. The metrics are a mandatory part of the outcomes based funding formula only in Texas and Tennessee. In the rest of the states, they are an optional metrics that institutions can choose from a list of possibilities.

While these states are leading the way on including this type of metric in their performance funding formula, others are showing interest in doing so. There are four things states should consider:

Level of accountability. Most experts agree that labor market outcomes are most meaningful at the program level. Mark Schneider from the American Institutes for Research testified before Congress this spring that “what a student studies often is more important than where they study it. In turn, we need to deliver…information at the program level.” Many states that include labor market outcomes in performance funding formulas apply to the entire institution rather than at the programmatic level where they make the most sense.

Data challenges. There are always data challenges and that is particularly true with labor market outcomes. These challenges can distort the picture the data present and are the reason that these metrics are not more widespread. Here are a few of the problems:

• States can’t easily share their data across state lines, which means schools don’t get credit for graduates who are employed out of state.
• The Federal Unemployment Insurance (UI) system, which is where states get their labor market data, does not include people employed by the federal government or who are self-employed.
• The UI system in most states does not include a person’s occupation or how many hours they work. As a result, it’s hard to find out if graduates are employed in a field related to their degree and to calculate their yearly wages.

Time lag. Different states use different time periods after graduation to generate their labor market outcomes. These timeframes vary from looking at student employment and wages just a few quarters after graduation to looking five years after graduation. The more academic the program, the longer many experts recommend you wait to measure students’ labor market outcomes. But holding a college responsible today for someone who graduated five years ago can be problematic. A lot can change in five years.

Other factors affect the outcome. Colleges should work to ensure that their graduates are qualified for the labor market. But schools don’t have direct control over what happens to students after they graduate. An economic downturn, for instance, could make employment and wages decrease independent of anything the college did.

These are difficult problems to tackle. One place to look for help is to the training programs that must report labor market outcomes data to the Department of Labor. These programs and the states they operate in have been wrestling with these issues for some time. As states continue to strengthen labor market outcome data, they should use these lessons to explore how the data fits in the accountability system. But they should also be careful to focus the data on improving programs and informing students in constructive ways.