Education and Its Effect on Wages

We are placing these two extracts, the first from Nobel prize-winner Joseph E. Stiglitz’s book, The Great Divide: Unequal Societies and What We Can Do about Them, the second from Thomas Picketty’s Harvard Press best seller Capital in the Twenty First Century, side by side to show clearly how the foremost economists of our day hold education as the single most powerful force for reducing income inequality.

Equal Opportunity, Our National Myth

young America“The Young Orator,” a 19th century American painting

The gap between aspiration and reality could hardly be wider. Today, the United states has less equality of opportunity than almost any other advanced industrial country. Study after study has exposed the myth that America is a land of opportunity. This is especially tragic: While Americans may differ on the desirability of equality of outcomes, there is near-universal consensus that inequality is indefensible. The Pew Research Center has found that some 90 percent of Americans believe that the government should do everything it can to ensure equality of opportunity.

Perhaps a hundred years ago, America might have rightly claimed to be the land of opportunity [see painting above], or at least a land where there was more opportunity than elsewhere. But not for at least a quarter of a century. Horatio Alger-style rags-to-riches stories were not a deliberate hoax. But given how they’ve lulled us into a sense of complacency, they might as well have been.

It’s not that social mobility is impossible, but that awkwardly mobile America is becoming a statistical oddity. According to research from the Brookings Institution, only 58 percent of Americans born into the bottom fifth of income earners move out of that category, and just 6 percent born into the bottom fifth move into the top. Economic mobility is lower in the United States than in most of Europe and lower than all of Scandinavia.

Another way of looking at equal opportunity is to ask to what extent the life chances of a child are dependent on the education and income of his parents. Is it just as likely that a child of poor or poorly educated parents gets a good education and rises to the middle class as someone born to middle-class parents with college degrees? Even in a more egalitarian, the answer would be no. But the life prospects of an American are more dependent on the income and education of his parents than in almost any other advance country for which there is data.

How can we explain this? Some of this has to do with persistent discrimination. Latinos and African-Americans still get paid less than whites, and women still get paid less than men, even though they recently surpassed men in the number of advanced degrees they obtain. Though gender disparities in the workplace are less than they once were, there is still a glass ceiling: women are sorely underrepresented in top corporate positions and constitute a minuscule fraction of CEOs.

Discrimination, however, is only a small part of the picture. Probably the most important reason for the lack of opportunity is education, both its quantity and quality. After World War II, Europe made a major effort to democratize its education systems. We did, too, with the GI Bill, which extended higher education to Americans across the economic spectrum.

But then we changed, in several ways. While racial segregation decreased, segregation increased. After 1980, the poor grew poorer, the middle stagnated, and the top did better and better. Disparities widened between those living in poor localities and those living in rich suburbs—or rich enough to send their kids to private schools. A result was a widening gap between rich and poor kids born in 2001 was 30 to 40 percent larger than it was for those born 25 years earlier, the Stanford sociologist Sean F. Reardon found. . .

Unless current trends in education are reversed, the situation is likely to get even worse. I some cases it seems as if policy was actually designed to reduce opportunity: government support in many state schools has been steadily gutted over the last few decades—and especially in the last few years. Meanwhile students are crushed by giant student loan debts that are almost impossible to discharge, even in bankruptcy. This is happening at the same time that college education is more important than ever for getting a good job.

Young people from families of modest means face a Catch-22: without a college education, they are condemned to a life of poor prospects; with a college education, they are condemned to a lifetime of living at the brink. And increasingly even a college degree isn’t enough: one needs a graduate degree or a series of (often unpaid) internships. Those at the top have the connections and social capital to get those opportunities. Those in the middle or at the bottom don’t. The point is that no one makes it on his or her own. And those at the top get more help from their families than do those lower down the ladder. Government should help to level the playing field. . .                                     — Joseph E. Stiglitz


Wage Inequality: A Race between Education and Technology          

Winslow_Homer_-_The_Country_School“The Country School” by Winslow Homer

Now consider the US case. Two economists, Claudia Godin and Lawrence Katz, systematically compared the following two evolutions in the period 1890-2005: on the one hand the wage gap between workers who graduated from college and those who only had a high school diploma, and on the other the rate of growth of the number of college degrees. For Goldin and Katz, the conclusion is stark: the two curves move in opposite directions. In particular, the wage gap, which decreased regularly until the 1970s, suddenly begins to widen in the 1980s, at precisely the moment when for the first time the number of college graduates stop growing, or at any rate grows much more slowly than before. Goldin and Katz have no doubt that increased wage inequality in the United States is due to a failure to invest sufficiently in higher education. More precisely, too many people failed to receive the necessary training, in part because families could not afford the high cost of tuition. In order to reverse this trend, they conclude, the United States should invest in education so that as many people as possible can attend college.

The lessons of French and US experience thus point in the same direction. In the long run, the best way to reduce inequalities with respect to labor as well as to increase the productivity of the labor force and the overall growth of the economy is surely to invest in education. If the purchasing power of wages increased fivefold in a century, it was because the increased skills of the workforce, coupled with technological progress, increased output per head fivefold. Over the long run, education and technology are the decisive determinants of wage levels.

By the same token, if the United States (or France) invested more heavily in high quality professional training and advanced educational opportunities and allowed broader segments of the population to have access to them, this would surely be the most effective way of increasing wages at the low to medium end of the scale and decreasing the upper decile’s share of both wages and total income. All signs are that the Scandinavian countries, where wage inequality is more moderate than elsewhere, owe this result in large part to the fact that their educational system is relatively egalitarian and inclusive. The question of how to pay for education, and in particular how to pay for higher education, is everywhere one of the key issues of the twenty-first century. Unfortunately, the data available for addressing issues of educational cost and access in the United States and France are extremely limited. Both countries attach a great deal of importance to the central role of schools and vocational training in fostering social mobility, yet theoretical discussion of educational issues and meritocracy is often out of touch with reality, and in particular with the fact that the most prestigious schools tend to favor students from privileged social backgrounds. . .                                                                               — Thomas Piketty





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