Monday, February 27, 2006

Education Pays--Just Not as Much as Hoped
One of the truisms of the policy field I work in is that post-secondary education is the best investment any individual can make in his or her economic future. And in a comparative sense, this is all but irrefutable: over the course of a working lifetime, the average college graduate makes as much as $1 million more than someone who boasts only a high school diploma. Even those who end their schooling with an associate's degree, or no college credential at all, earn dramatically more than high school grads who never set foot in a college classroom. The argument that education pays has been such a mainstay in Center for an Urban Future reports that we had a shorthand name for the chart used to illustrate the earnings premium for college grads: "More Ed, More Bread." Here's the same info with a bit more color to it.

A corollary to the Education Pays case is that as the United States and global economies become ever more responsive to "knowledge workers" and the specialized training one can only get after high school, the earnings differential would only continue to grow. Adding in the coming demographic crunch that's been a particular focus for me--in brief, what happens as Baby Boomers start to retire or cut back their hours in large numbers over the next 10 years or so--one can predict that the rate of earnings increase for college grads will spike as employers grapple with a shortage of high value workers that some analysts project will run close to 10 million by 2020.

All this might indeed turn out to be the case. But in his New York Times column today (subscription only; I finally swallowed hard and ponied up for TimesSelect), Paul Krugman points out that it isn't happening just yet.

What we're seeing isn't the rise of a fairly broad class of knowledge workers. Instead, we're seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite.

I think of Mr. Bernanke's position, which one hears all the time, as the 80-20 fallacy. It's the notion that the winners in our increasingly unequal society are a fairly large group — that the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization are pulling away from the 80 percent who don't have these skills.

The truth is quite different. Highly educated workers have done better than those with less education, but a college degree has hardly been a ticket to big income gains. The 2006 Economic Report of the President tells us that the real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.

Krugman goes on to note just how skewed the earnings increase has been: between 1972 and 2001, Americans at the 90th percentile of earnings saw their real wages increase by about 1 percent a year--not bad, but far from spectacular. (What I wish he'd included was how this compared to the change for those further down the distribution.) At the 99th percentile, however, income nearly doubled, rising 87 percent over the period. Those in the top 1000th of earnings did twice as well again, as their income increased by 181 percent. And the highest-earning 10,000th of Americans hit the jackpot, as their take-home pay exploded by 497 percent.

On Josh Marshall's site, Max Sawicky comments more strongly on what he deems the "meritocratic fallacy." In his take, the argument does seem to more closely resemble what's sometimes called Social Spenserism: the notion that the wealthy somehow inherently deserve their wealth, and the destitute their suffering.

What bothers me as a policy researcher is that I've been as guilty as Ben Bernanke and most others (on a comparatively miniscule scale, but still) in advancing this notion of a semi-meritocratic elite moving forward. Again, Krugman sums up nicely why this is such a common view:

Why would someone as smart and well informed as Mr. Bernanke get the nature of growing inequality wrong? Because the fallacy he fell into tends to dominate polite discussion about income trends, not because it's true, but because it's comforting. The notion that it's all about returns to education suggests that nobody is to blame for rising inequality, that it's just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.

The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story.

While it's always helpful to have the facts at hand and to puncture even semi-benevolent myths like this one (I'm not particularly sorry to see an argument that pushes more people toward higher education, even if it's inaccurate on specifics), the solution is not as clear-cut. Krugman is historically correct in asserting, as he does in the close of the article, that at some point wealth inequity undermines democratic society, and it's probably a political winner for Democrats and maybe moderate Republicans to point out the widening gap between aggregate GDP growth and real-wage stagnation for almost everybody. But how do you push a more equitable distribution of profits from our more productive economy without too strongly disincentivizing entrepreneurship? I suppose it's a question that has to be answered through governmental art, rather than economic science.


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