college degree – Jeffrey C. Goldfarb's Deliberately Considered

The Metrics of Protest: Black Friday and Low-Wage America

David Howell — Wed, 30 Nov 2011 00:12:46 +0000

The headline on the front page of the Thanksgiving Day The New York Times: “Opening Day for Holiday Shopping Shows Divide.”

The next day – Black Friday – Bloomberg ran a story with the headline “U.S. Workers’ Pay Slide Poses Consumer Risk. ”

It may turn out to have been a “Black Friday” for top end retailers, but it’s a bleak season for low income America and the businesses that cater to it. According to the Times’ story: “Wal-Mart’s profits declined in the third quarter as it kept many prices low so its shoppers could afford them.” Michael T. Duke, Wal-Mart’s chief executive, told analysts that ‘There is a real sense that the economic strain is taking its toll.” Without the fuel of credit that had increasingly been required to power spending by low-income workers, Wal-Mart now has to resort to layaway plans for its shoppers.

As 10 percentage points of national income has been directed away from the bottom 80% to the top 1% since 1979, those paid the lowest wages have seen their buying power erode the most. While the quality and quantity of education force can explain much of the distribution of income within the bottom 99% (together with personal networks, effort and luck), differences in educational attainment have nothing to do with the transition of the American economy to extreme inequality since the 1970s. It is also quite clear that among developed countries, America is exceptional: only the UK comes close to US-style extreme inequality.

The lesson is that extreme inequality is the outcome of political choices that have empowered a tiny minority. It has to do with political choices, the way institutions function, and social norms; it is not a natural market payoff to investments in education. The shift of income to the top .1% (which has driven the growth of the top 1%) reflects the market power of a small number of CEOs and finance, medical and legal professionals.

Here are some metrics that focus on what has happened to the wage/salary earnings of American workers.

Employee compensation in the last quarter (April-September 2011) accounted for the smallest share of national income since 1929 (it was 44%, which compares to 53% as recently as 1970). In contrast, the corporate profit share was the largest since 1929 (10% in 2010, compared to 5% in the 1970s and 1980s). (as reported in The New York Times)

What about the distribution of income, regardless of whether it comes as wages/salaries, profits or interest? The following shows the changes from 1979 to 2007:

the top 1% of households increased its share of after-tax income from 8% to 17%;
the middle 60% of all households saw a decline from 50% to 43%;
the after-tax income share received by bottom 20% fell from 7% to 5% (see my first post).

What happened to average real wages by education group (in 2007 dollars)?

workers with just a high school degree had a real hourly wages decline by 35 cents, from $15.36 to $15.01;
workers without a high school degree experienced a collapse of $2.29 per hour wage, from $13.69 to $11.38;
workers who invested in college but didn’t graduate , wages increased by 56 cents, from $16.42 to $16.94, a gain of 3%.
workers with only a college degree gained about $5, from $21.53 to $26.51, a rise of 23%.

It’s important to put into perspective this 23% increase in wages/salaries for those with the highest educational attainment.

First, it is not close to the gain in output noted above (+225%), or the increase in output per capita (+50%), or the increase in the share of national income taken home by the top 1% (+144%), much less the the top .1% (324%) (EPI Briefing Paper #331, figure D).

Second, there was no increase in real pay for the college+ group from 2001 to 2007; by this measure, the Bush “boom” entirely bypassed the most educated.

And third, recent research has shown that about one-fifth of the increase in the college-to-high school wage gap between 1980 and 2000 was accounted for by the higher cost-of-living in the (increasingly income-segregated) communities where those with college degrees live (NBER Working Paper No. 14370).

The fact is that as a group, even those with at least a college degree have shared little in America’s growth during the age of free market fundamentalism. It’s not about education.

What does this mean for the standard of living for most Americans? A new and much improved measure of poverty from the Census Bureau has found that, after accounting for taxes, government benefits, and typical expenses, one in every three Americans (33%)was classified in 2010 as either poor ($11,282 for an individual and $24,343 for a family of four) or near poor (50 percent above the poverty line). Further, the Census Bureau found that 10.3 million people who worked full-time in 2010 fell into the “near-poor” category.

It turns out that this 33% poverty/near poverty rate for American households is nearly identical to the share of American workers paid a very low wage, as Figure 1 shows. For reference, this figure presents the low-wage share for France (which has nearly eliminated low wages by steadily increased the statutory minimum wage). As I’ll show in another post, France has achieved this over the last decade without increasing the unemployment rate or decreasing the employment rate for young workers. (The source for this and the statistics on France that follow: a forthcoming paper by Howell, Okatenko and Azizoglu.)

Figure 1:

Low-Wage Shares of Employment for the US and France (low-wage = less than 2/3 of the median full-time wage)

Figure 2 shows that most young American workers with only a high school degree are now paid extremely low wages. This is most certainly NOT the case in France. Almost half of all young American male workers were paid low wages in 2009, up from just 17% in 1979. In contrast, only about 12% of young French male workers with just a high school degree were paid low wages, down from 20% in 2009.

This figure also shows that the US-French gap in the low wage share for young female workers was gigantic: 65% of American female workers with just a high school degree were low-paid in 2010, which was up from 45% in 1979, compared to just 18 percent for their French counterparts, which was down from 25% in the mid-1990s. The payment of low wages is a political choice.

Figure 2:

Low-Wage Shares of Employment for Young Workers (20-34) with only a High School Degree, the US and France

Finally, it is worth pointing out that it is not just poorly educated American workers who are being paid low wages. Figure 3 shows that the low-wage share of workers with “some college” was 50% in 2010, up from 29% in 1979. For those with college and graduate degrees, in 2010 the figure was 19.5%, up from 13.3% in 1979.

Figure 3:

Low-Wage Shares for Young (20-34) US Workers by Education Group

In sum, it’s no surprise that there is a “divide” among consumers and that low end retailers are in trouble. The problem is the redistribution of income away from most households in an age of drastically reduced credit. The results: 1/3 of American households are poor or near-poor, 1/3 of all workers are paid low wages, the real earnings of those without a college degree have fallen or remained constant since the 1970s, there has been a sharp decline in the labor share and record levels for profits, and extreme inequality (the share of income received by the top 1%) has exploded. These outcomes reflect policy choices made under a regime of free market fundamentalism.

To return to the pre-1979 income distribution, we must fundamentally change the way compensation systems work at the very top of the income distribution, but we also need to substantially raise the wage paid to the bottom third of American workers. There is no economic reason why America must be in a league of its own within the developed world in both extreme inequality and the incidence of low pay.

The Metrics of Protest: Extreme Inequality and the Payoff to College Degrees

David Howell — Mon, 07 Nov 2011 21:02:22 +0000

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 (81^st-99^th) 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 1^st 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 1^st Earnings Quartile (Usual weekly pay X 50)

Source: Bureau of Labor Statistics