Why Inequality Is About Education

For Europeans who visit this country, one of the most refreshing and inspiring aspects is the absence of a strong sense of social class. Even today the idea of class is pervasive in countries such as Great Britain and (as much as its inhabitants would bitterly deny it) France. Blue-collar workers have a very different perception of their place in society from white-collar professionals. This of course affects not just their sense of self but also their aspirations and political inclinations. By contrast, the concept of class does not resonate here. In fact, when asked by pollsters, most Americans—those making $20,000 and $300,000 alike—answer that they belong to the middle class. I have always thought that this is one of the fundamental cultural differences between the Old and New Worlds, a difference that could account for the stronger entrepreneurial spirit among Americans and the different attitudes toward income inequality and income redistribution.

 TABLE 4: HOURLY AVERAGE WAGE OF MEN, BY EDUCATION (2011 DOLLARS)

	1980	2010	Percent change
Dropout	$13.7	$11.8	-14%
High school	$16.0	$14.8	-8%
College	$21.0	$25.3	+20%
Advanced degree	$24.9	$33.1	+32%

Note: Data include all full-time workers aged 25–60.

But whatever Americans’ self-perception is, differences in income levels are growing. As we have seen throughout this book, this increase has a strong geographical component. But it is also skill-based. Table 4 shows how the hourly wage of full-time male workers has changed since 1980 depending on their level of schooling. The wages of men with less than a high school education and of those with just a high school education today are lower than they were in 1980. By contrast, the wages of college graduates have increased significantly. The gain is even larger for workers with a master’s degree or a PhD.

The “college premium”—the wage gap between those with high school and college educations—is the measure that labor economists most commonly use to track changes in labor market inequality, because it best captures the difference between the typical skilled worker and the typical unskilled worker. This premium was relatively small in 1980—only 31 percent—but has been growing every year since then and is now more than double its 1980 level. This difference is even higher when you account for other aspects of compensation, as college graduates tend to have better employer-paid health insurance and more generous pension contributions.12

 Wage inequality is a hot topic right now. One widespread misconception is that the problem of inequality in the United States is all about the gap between the top one percent and the remaining 99 percent. Although the super-rich capture people’s imaginations, their earnings are not the main driver of these figures. These numbers do not reflect the gap between the millionaires with penthouses on Park Avenue or the startup whiz with millions in stock options and the rest of us. Instead they reflect the difference between the typical college graduate and the typical high school graduate: regular people with regular jobs, families, and mortgages. If we dropped all the CEOs and financiers from the data, the table would be largely unchanged. The most important aspect of inequality in America today is not what happens to a few thousand tycoons. The increase in their share of wealth is certainly a problem, but not as consequential as the rapidly growing divide between the 45 million workers with a college education and the 80 million workers without one. As we are about to discover, this is the difference that really matters for people’s lives—their standard of living, their family stability, their health, and even the health of their children.

Another misconception is that the increase in wage inequality is mostly caused by deliberate economic policies: the decline in the real value of the minimum wage; the weakening of the institutions that used to protect low-wage earners, such as unions; and the general trend toward deregulation. But a careful reading of the data suggests that institutional factors have played only a secondary role. Wage inequality has increased in the past thirty years in many different countries in Europe, Asia, and the Americas—each with different labor market institutions, regulations, tax policies, union penetration, and levels of minimum wage. In the United States, wage inequality has increased both in blue states with high minimum wages and in red states with low minimum wages. It has increased in most sectors, both those with high unionization rates and those with low unionization rates.

 The reality is that the trends in wage inequality reflect forces that are deeper and more structural. A vast body of recent research indicates that these trends can best be explained by changes in supply and demand—namely, an increase in the demand for college-educated workers and a slowdown in the supply. In a remarkable book, the Harvard economists Larry Katz and Claudia Goldin explore this race between demand and supply over the course of the twentieth century and demonstrate that for most of the century, supply outpaced demand, and this kept inequality in check. The share of Americans going to college was growing at a rapid rate during the 1950s and 1960s, and as a consequence the earning gap between college and high school graduates was stable or declining. But over the past four decades demand has prevailed and inequality has exploded. The slowdown of supply has been particularly pronounced for men: between 1980 and today, college graduation among young white male adults (ages twenty-five to thirty-four) rose very little, from 22 percent to 26 percent. Fortunately, the numbers for women look better: although they too initially slowed, they have recently picked up again. Today 60 percent of recent college graduates are female and 40 percent are male, a remarkable change since 1980, when the reverse was true. The two Harvard economists show that if the increase in the number of college graduates since 1980 had kept pace with the earlier rate, wage inequality in America would have fallen in the past thirty years, not increased.

 What should we do about this? We know the reasons for the increase in the demand for skilled labor: technological progress, globalization, outsourcing, and the shift away from traditional manufacturing industries. And we have seen why the transformation to an idea-driven economy fueled by human capital is a good thing for America. Thus there is little the government could or should do to limit the increasing demand for skilled labor. On the other hand, there is quite a bit we can do to increase its supply.

To step back for a minute, the slowdown in the supply of skilled labor is rather baffling. Given that the wages of college graduates have increased so much more than those of less educated workers, why aren’t more young people taking advantage of this fact by going to college in the first place? When presented with this puzzle, the standard reaction is to point to the growing cost of college: college was cheap in the 1970s, but since then tuition at both private and public institutions has skyrocketed. Tuition at Yale has increased from $6,210 in 1980 to $40,500 today. Tuition at Berkeley has increased from $776 in 1980 to $13,500 today, an even steeper increase percentage-wise. These are not exceptional cases; tuition at the typical American college has increased tenfold in the past three decades, substantially more than most other goods or services sold in the economy. Is this the root of the problem?

Most seventeen-year-olds think about going to college as a way of moving out of their parents’ house, having new experiences, and maybe occasionally getting drunk. Economists, undeniably a dull bunch, tend to think about the decision in purely financial terms. In 1964 the University of Chicago economist Gary Becker wrote a book called Human Capital, for which he was later awarded the Nobel Prize. The central idea is simple but powerful. The decision to go to college is at its core just like any other investment decision. When you buy Treasury bonds, you pay a cost up front and you receive a flow of revenues over time. Becker pointed out that going to college is much the same. In 2011 the up-front cost was remarkably high. Taking into account tuition costs and the forgone salary that an individual would earn by working for four years, the total investment cost comes to $102,000.

 This is an enormous sum. But the benefits are much larger. Figure 11 compares the average salary of a typical college-educated worker with the salary of a worker with a high school diploma over their lives. The gap is large at age twenty-two and grows larger over time. It reaches a peak at age fifty, when the average college graduate makes almost $80,000, compared to $30,000 for the average high school graduate. If a seventeen-year-old decides to go to college, she can expect to earn more than a million dollars over her lifetime. If she does not go to college, she will make less than half that amount.13