Income Inequality and the College Premium

Could it be that the major cause of the growth in income inequality over the past 30 years has simply been our inability to educate and train students in a way that prepares them for the demands of an evolving economy? Timothy Noah seems willing to accept that notion in his book investigating the factors that may, or may not have, contributed: The Great Divergence.

Depending heavily and the studies of two economists, Claudia Goldin and Lawrence Katz, he presents this statement:

"Goldin and Katz calculate that the increase in economic returns to education is responsible for about 60 percent of the increase in wage inequality between 1973 and 2005."

What is it about our education system and its relationship with our evolving society and economy that has allowed this "Great Divergence" in incomes to occur? Noah provides a compelling explanation.

It is convenient to divide jobs into three categories: low-skill, mostly service positions that require little training and little education; middle level positions that require a greater level of training and education, and involve decision making; and an upper level that demands initiative and knowledge, and, thus, a high degree of education and skill. The dynamic that seems to be in effect is mostly technology driven. Activities that require a modest level of physical or intellectual skill have been easily replaced by automation and by computers. While the economy continues to produce low skilled jobs that require human activity, it is the moderately skilled activities that are being phased out. This is a phenomenon that seems common to all advanced economies. The Japanese have coined the term kudoka to describe it. Others use the term "job polarization."

College-educated workers have always earned more, on average, than those with a lower level of education. This difference in expected earnings between a college graduate and a high school graduate is referred to as the "college premium." The same dynamic that is hollowing out the mid-level jobs is placing greater emphasis on a college education, but apparently not just any college education. The nature of business and technology today seem to be demanding more intense or more specialized knowledge which would come from a degree focused on a particularly valuable skill such as engineering, or on the capabilities inherent in acquiring a post-graduate or professional degree.

Noah provides an interesting chart that indicates the relation between supply and demand for college-educated workers over the years.

College attendance during the post-war years expanded rapidly producing an oversupply, but demand would begin to accelerate its growth in the ‘50s finally equalizing with supply around 1970. There was then an interesting little surge in supply that is attributed to students flocking to college in greater numbers in order to avoid being drafted for the war in Vietnam. This phenomenon caused a glut of graduates and some rather tough times for the highly educated in the mid-‘70s, a time some of us remember quite well. Since that time, the demand has always exceeded the supply.

The college premium is significant. Consider this chart:

The earnings potential of a college graduate is nearly double that of a high school graduate. Integrated over a lifetime that is enough money to justify a significant investment in one’s education. Why then has supply not kept up with demand?

"The gains [in educational attainment] virtually halted with 1976’s cohort of twenty-four-year olds. Educational attainment started growing again in the 1990s, but at a much slower rate. Here’s another way to put it: The average person born in 1945 received two more years of schooling than his parents. The average person born in 1975 received only half a year more of schooling than his parents. In 1970 the high school graduation rate fell: after that it leveled off at about 75 percent."

Since it seems to be a unique trend associated with the US, it is hard to blame it on technology, or globalization, or whatever. According to OECD data, the US was once the leader in producing a college-educated population, but was surpassed by many other developed countries around the turn of the century.

"And while the college attendance rate in the United States has continued to rise, growth in the college completion rate has slowed sufficiently to put twenty-five to thirty-four-year-olds in the United States behind Australia, Belgium, Denmark, Ireland, Norway, New Zealand, Canada, Japan, and Korea. ‘We have the most-educated fifty-five-year-olds in the world.’ Katz told me. ‘But we’re in the middle of the pack for twenty-five-year-olds’."

There is no clear answer to why our gains in educational attainment have slowed. It is easy to blame this effect on our primary and secondary schools, but one should at least provide an explanation for why it happened. Neither Noah, nor his experts, seem to have a ready answer. Clearly college education has become more expensive as the increasing value of education has driven up its market value. And recently, public colleges have become much more expensive due to funding cutbacks caused by the recession. Yet, it seems there is more involved than simple costs. The issue is worthy of a longer and more detailed discussion.

Noah points out that the college premium’s growth has also slowed down over the last decade or so. He attributes this to the increased demand for post-graduate degrees. The benefit from this more advanced educational path is demonstrated by this chart from a New York Times article by Catherine Rampell.

Clearly experience and an advanced degree payoff in the occupations studied.

What is the bottom line in terms of advanced education and growing income inequality? The 60% effect on income inequality may or may not be numerically very precise, but it makes compelling the notion that if we are to solve our social and economic problems we are going to have to improve our educational attainment results. Going to college and acquiring a random four-year degree seems to be no longer sufficient; one must emerge from the experience with a skill or a demonstration of the capability of accomplishment that exceeds what was expected of earlier generations.

Actually, it was rather refreshing to encounter an explanation for income inequality that did not require conjuring up rapacious capitalists or irrational politicians. This is something even our wounded society should be able to deal with.

Noah’s presentation on the subject suggests that our troubles extend beyond merely improving math and reading scores on standardized tests. Such an accomplishment does not necessarily provide greater motivation to students, nor does it instill a love of learning. Both are necessary if our children are to be willing to make the increased personal investment required to compete in the current economy.