Not so long ago, during the first several decades of the post-war era, the American dream of a broad and growing middle class was a significant reality. But since the 1970s the shape of the American distribution of income has steadily become more like an hourglass: as the middle has collapsed, large numbers of workers earn very low wages and at the other end of the scale, very few take home gigantic sums.
Figure 1 shows the extraordinary reallocation of national resources from the bottom 80 percent of the population to the top 1 percent, while those in between (81st-99th) have, as a group, shown no change in their share of total income.
FIGURE 1
Source: CBO Report “Trends in the Distribution of Household Income Between 1979 and 2007”
Not surprisingly, over the last three decades many households in the bottom 80 percent have faced sharp declines in their standard of living as the costs of health care, higher education, food and energy have risen far faster than the wage check. The result has been the accumulation of unprecedented levels of mortgage, credit card, and student debt.
I have argued that the roots of the economic crisis can be found in the shift in economic thinking and public policy toward free market fundamentalism in the 1970-80s, which fueled the rise in debt, financial instability, and extreme inequality. We’ve seen a toxic mix of financial deregulation, evisceration of protective labor market institutions (like collective bargaining and the minimum wage), a political system corrupted by campaign contributions, and an increasingly polarized education system that performs poorly for most of those in the 80 percent and terribly for the most disadvantaged communities.
But this is not at all the conventional wisdom. Rather, it has become widely accepted that the government is the root cause of the economic crisis of 2008-11 and the decline in living standards for the vast majority. The problem in this conservative vision is too much regulation, too much taxation, too much encouragement of home ownership for low-income families, and government workers (who take too much for themselves in wages, benefits and job security). And worst of all is fighting the economic crisis with deficit spending. Incredibly, many leading academic economists have lent support to this free market fantasy, which of course has the causation between unemployment and government spending exactly backwards.
In the free market vision, extreme inequality is not the real problem. It is government spending and regulations, and reducing both would induce employers to generate jobs, workers to get off unemployment benefits, and students to invest in their own education (as public spending for education is cut back). Mainstream economists have long been fixated on supply side solutions to inequality and low pay. It is a natural part of the package of free market orthodoxy: more education makes people more productive and in competitive labor markets workers get paid what they’re worth (otherwise known as their “marginal product”).
A good example of this free market vision can be seen in David Brooks’ recent column in which he argued that the “right” inequality to worry about is not what’s going to the top 1 percent, but instead it is the “chasm between college and high school grads.” And we get much more than just higher incomes from more higher education. As he put it: “Today, college grads are much less likely to smoke than high school grads, they are less likely to be obese, they are more likely to be active in their communities, they have much more social trust, they speak many more words to their children at home.”
Unfortunately, while college grads may, on average, have higher scores on all these good outcomes, it seems unlikely that an increase in college degrees would have any effect on any of them. Let’s say we increase in the 6-year graduation rate for Bachelor’s degrees from about the current abysmal level of 55% (see below). Should we really expect to see less smoking, less obesity, more social trust and more words spoken to children? Actually, given the costs and benefits of college attendance spelled out below, we might reasonably expect these outcomes to worsen, as recent graduates with modest incomes realize that they are unable to pay off their mountainous student debt.
So what is the payoff to getting a college degree? We can start with Figure 1. Since 30 percent of the population over age 25 had college degrees in 2010 (Department of Education, Digest of Education Statistics: 2010, table 8), not many college graduates could have been among the top 1 percent of winners.
Figure 2 provides a view of the timing of the growth in inequality at the top. Saez shows that all the action at the top has taken place within the top 1%, whose share of total income rose from about 14% in 1993 to 23% in 2007, and then declined to about 21% in 2008, as the financial system nearly collapsed.
FIGURE 2
Nothing like this sort of take-off in inequality appears in the earnings data organized by educational attainment. Figure 3 shows that real earnings for those with only a college degree rose modestly in the 1990s and not at all since (in 2007 dollars). At the peak of the last business cycle, in 2000, the average college graduate wage was $25.86 and increased to $26.40 the next year. Six years later the college wage was $26.51. Measured from 2001 to 2007, the Bush “boom” increased the average college wage by a full 11 cents.
It is true, as Figure 3 reports, that average wages have been much higher for college than high school graduates. But while the average college graduate earns about 1.7 times more than the average high school graduate, this ratio has remained unchanged since 1998: the payoff to a college degree stopped increasing over a decade ago.
The share of young people (25-29) with a college degree rose in the 1990s, but this measure of rising educational attainment has been flat in the 2000s: 29.1% in 2000, 29.6% in 2007 and 31.7% in 2010 (Department of Education: Digest of Education Statistics: 2010, Table 8).
But while many more students have sought post-secondary degrees, the reality of low wages for recent graduates and high costs of schooling have produced dismal graduation rates. Students entering a four-year college in 2003 had a graduation rate of just 55.5% six years later. Even worse, community colleges offering a two-year Associate’s degree report a three year graduation rate of just 29.2% for the 2006 entering class (NCHEMS Information Center, from Department of Education data).
The fact is that many students do not complete college, perhaps partly because they are pretty good at weighing the benefits and costs. Figure 3 graphically illustrates the tiny payoff to going to college and not finishing a four-year college degree. On average, the wage increase from “some college” over a high school degree was $1.85 per hour in 1998, $2.03 in 2000, and $1.92 in 2007.
FIGURE 3
Real Hourly Earnings by Educational Attainment, 1979-2007 (2007 dollars)
Source: Economic Policy Institute
If we succeed in getting more students out of college with diplomas, nearly all will get paid far less than the average college graduate (since they are younger and will come from the lower part of the high school performance distribution). Figure 4 compares the median annual earnings for high school graduates in 2010 with the average annual earnings of those in the 1st quartile of the college graduate earnings distribution (those with earnings in the bottom 25% of earnings for all college grads). The increase for undertaking an additional four years of schooling is $5,600 for women and $4,850 for men.
Ignoring the complications of discounting, let’s say it cost $10,000 per year in tuition and related costs, and opportunity costs of $25,000 (foregone earnings, at slightly below the median high school graduate rate). Let’s further assume she won’t need to bear any costs of student loans (an entirely unlikely scenario – generally only possible for those whose parents are in that top 1%…).
Under this scenario, she’s got $140,000 invested in her college degree ($35,000 x 4). If her payoff is the average one ($5,600), it will take her about 25 years to break even.
This simple example illustrates the reality that the payoff to getting a college degree isn’t so obvious, given a labor market paying low wages to almost one-third of all workers and costs of education that are rising far faster than the overall inflation rate. This helps explain not just the dismal graduation rates mentioned above, but also why the percentage of 25-29 year olds with a college degree or more has hardly budged over the last decade (29.1% in 2000, 29.6% in 2007, and 31.7% in 2010; Department of Education, (Digest of Education Statistics: 2010, table 8).
It will take some radical institutional changes before we get to a more egalitarian and productive economy, as Brooks would have us do. We would need substantial reductions in the incidence of low pay and the burden of post-secondary education costs on less well-off families. Progressive change requires reversing the inequality revealed in figure 1: let’s start by giving back those 10 percentage points of national income to the bottom 80 percent of the American people. One critical step is to reduce the incidence of low pay without reducing job opportunities. Some say this is not possible, but France has shown that it can be done. I’ll make that case in the next post.
FIGURE 4
Median Annual Earnings in 2010 for High School Graduates and Average Earnings for College Graduate in the 1st Earnings Quartile (Usual weekly pay X 50)
Source: Bureau of Labor Statistics
Quite a detailed article. Many of the jobs, such as factory jobs, that have left the United States did not require a college degree. Other jobs require some technical training, but not necessarily a college degree. In any event, its seems a rather odd notion that college education alone will generate jobs. In fact, given the exorbitant costs of a college eduction, promoting such education with corresponding job creation seems rather foolish. Then you have a workforce with a sizable debt, and limited prospects. The real issue is why, at the same time the benefits of economic growth have shifted disproportionately to the top 1 percent, the average cost of college education, even adjusting for general inflation, has doubled.
Quantifying the value of college degrees poses many challenges. First, I’m assuming that in this analysis values other than economic are being disregarded. The qualitative benefits may be significant. Secondly, not all college degrees are the same. Some college degrees have more economic value than others. For instance, engineering degrees typically have led to higher paying initial positions than degrees in the humanities. Some advanced degrees tend to have more value than others. For instance, a Master’s degree in Business tends to have more economic value than a Master’s degree in sociology, all other things being equal. Combinations of degrees such as a CPA plus a Law degree or MBA, or an Engineering degree and MBA may have more initial value than some other combinations.
Perceived value is determined by organizations and people paying for services of the degree holder. This is especially applies as the initial determinant of the value of the degree. Afterwards, the value of the degree will be typically be determined by performance, the ability of the individual to either create value or contribute to the creation of value, the amount of value created, timing and other circumstances.
An obvious question may be why has there been a longer term trend towards income stagnation for large numbers of highly qualified people. I suspect that the most obvious answer is that the value of credentials is considered on a more global basis. Domestic workers with excellent credentials are now being replaced with work done elsewhere in the world by well qualified individuals working for less compensation. Thus, the value of credentials in the United States has been negatively impacted. In essence, income is being redistributed to other places in the world.
The compensation of the top 1% can also be linked with perceived value creation. While there are many inequities and many specific compensation packages can be questioned, in aggregate, I suspect that the value creation explanation still works better than many others especially when combined with a number of additional factors.
My guess is that the value migration from the United States earners to others elsewhere in the world may be linked with what I perceive to be a weakened center in modern world-system, to use a Wallerstein term. As the center became more fragmented in the decades following World War II when most of the world’s production capability was concentrated in the United States, the United States has slipped closer to entering the semi-periphery as the productive capabilities of other nations has increased.
In addition to structural explanations, I think that we need to consider agency issues. A recent article by Michael Tanner of the Cato Institute states that, “Roughly 80 percent of millionaires in America are the first generation of their family to be rich.” Upward mobility still seems possible. I briefly examined Forbes profile of billionaires. I was surprised at the numbers of billionaires who were from challenged backgrounds. Entrepreneurship is one of the biggest reasons. There are numerous other factors that influenced this group which comprises a very small percentage of the top 1%, and the top 1% as a whole.
I suspect that unless there are significant social and economic changes; and actors make fundamentally different choices, then the situation will continue to worsen. Many policy proposals, in my view, are stopgap measures at best, and may actually have negative longer term impacts.
We cannot continue to promote college as the only standard for the social and economic success of our society. A society based solely on the exchange of information will ultimately collapse. The former success and strength of the United States was the strength of our middle class, consisting of both production of goods, service-oriented jobs and more specialized professions. With many of the production and service oriented positions being outsourced to other countries with fewer constraints on working conditions and on pay, we have lost the backbone of our culture; the strong middle class. One answer may be to buy more American made products and local services. Where there is demand, there will be production. Second, perhaps not everyone should be admitted to college. My mother grew up in an era during the depression where high school students were given the choice to prepare for a trade, clerical position or be college bound. Those graduating from high school were prepared to work or move onto college. To survive, our society needs more balance in production of goods, locally grown foods, locally owned services and more specialized professions requiring a graduate or doctoral level education.
We cannot continue to promote college as the only standard for the social and economic success of our society. A society based solely on the exchange of information will ultimately collapse. The former success and strength of the United States was the strength of our middle class, consisting of both production of goods, service-oriented jobs and more specialized professions. With many of the production and service oriented positions being outsourced to other countries with fewer constraints on working conditions and on pay, we have lost the backbone of our culture; the strong middle class. One answer may be to buy more American made products and local services. Where there is demand, there will be production. Second, perhaps not everyone should be admitted to college. My mother grew up in an era during the depression where high school students were given the choice to prepare for a trade, clerical position or be college bound. Those graduating from high school were prepared to work or move onto college. To survive, our society needs more balance in production of goods, locally grown foods, locally owned services and more specialized professions requiring a graduate or doctoral level education.