I stumbled on a number of facts today that put me in mind of the old, venerable debate among labor economists about the extent to which educational wage premiums driven by employers’ increased demands for skills is driving overall wage inequality. It sounds obscure, but it actually has very potent policy implications. Let me try to quickly break it down.
–The gap between high, middle, and low wages has grown a great deal since the late 1970s. No secret there. In real terms, this has meant long periods of wage stagnation for middle- and low-wage workers.
–At the same time, the earnings of those with college educations have grown a lot relative to those with terminal high-school degrees. Economists interpret this as increasing returns to “skill,” or more wonkily, evidence that technological advances, like computerization in the workplace, are increasing complementary to the skills college-educated workers bring to the job.
–The policy conclusion is “get more education!”
–But while I solidly subscribe to that admonition, there’s a ton more going on under the surface. For example, anything that drives down the pay of the non-college educated, who still account for about 2/3 of the workforce, also drives up the college wage premium. So, you must try to parse out declining union power, falling minimum wages, weak macroeconomies (the absence of full employment), and more, from the skill-demand part of the story. And this, of course, has major implications for the policies we pursue to close the gap and reverse the wage stagnation for the majority of the workforce.
–Moreover, and this part is particularly notable, the college wage premium, while as high as ever, hasn’t grown much over almost two decades. The figure below was in the WSJ this AM, in an interesting piece about how, given the rising costs of college relative to incomes, some kids and their parents are taking a closer look at alternatives like technical/vocational programs. The figure makes two important points: the premium is as high as ever (wage signal: go to college!), and it hasn’t risen since 2000.
The next figure relates to that stable trend, and it’s kind of the punchline, in terms of the facts. It’s from EPI economist Elise Gould’s recent comprehensive wage analysis (I’ve got a piece on her minimum wage by state findings coming out soon) and it takes some unpacking. The dark blue bars of the left show a measure of the growth in wage inequality: the yearly growth of the gap between high (95th percentile) and middle (50th percentile) hourly wages. The light blue bars on the right show the growth of the college premium, adjusted for a bunch of stuff including race, age, gender, etc. (see figure note).
Basically, the figure is showing you how much of the growth in the left bar might be explained by the right bar. From 1979-2000, the answer is “all of it.” Putting aside my important caveats that it’s not just skill premiums driving the college-HS wage gap, one can certainly look at those trends in the left two bars and call it an education story.
You can’t tell that same story, however, for the bars on the right. Though wage inequality by this measure has grown at a constant pace since 1979, since 2000, something other than the college wage premium mostly drove it up. I’ve given you some candidates above, and I’d add over this period: especially large trade deficits and the rise of the finance sector.
But the larger point is policy arguments like “it’s all about education” or “if only everyone got a college degree, these wage problems would go away” are simply not supported by the post-2000 data. To be crystal clear about this, higher education remains a critical way up the ladder of opportunity, especially for those groups that are under-represented among college graduates, and robust policies to help them must be a big part of the mix. But we must also pursue policies that strengthen labor standards, worker bargaining power, and full employment. In fact, this two-sided policy mix is the essential combination for pushing back on wage inequality and stagnation.