The Other Income Inequality: The College Wage Gap

While Piketty focuses on how the really rich are pulling away from everyone else in terms of wealth, others have made the case that the college wage gap is the most pressing form of income inequality.  Here is a good and detailed article on the subject.  His claim is that while the 1% disproportionate increase in wealth is alarming, the growth of the college wage gap, if redistributed, would increase the welfare of the poorest people more than any gains from redistributing the increase in wealth of the economic elite.  This follows mostly because there are just so few economic elite.  The fact that it is only 4 times as great when the percentage of the population with college degrees is 25 times higher should be slightly worrying.

While I agree that this is worrying, I am not sure it is AS worrying.  After all, the physics professor making $100k is not in any danger of twisting political power around his finger to get what he wants.  A person with a billion dollars that is going to keep growing is far more menacing; look at all the activism by the Koch brothers.  Secondly, the gains of the 1% seem far less justified than those accrued by people investing in education and reaping the returns.

Furthermore, much of the gap is explained by an actual decline in the real wages of low education workers.  The loss of manufacturing jobs  with unions bolstering wages due to offshoring, automation and just plain efficiency gains has pushed low skill workers into a service sector with no organized labor movements and very low wages.  Also automation is starting to erode their value in that sector as well and will likely continue to do so.  For instance if driverless cars are perfected say goodbye to taxi and truck drivers.  A minimum wage that hasn’t kept pace with inflation hasn’t helped their cause either.

The article linked also shows a stagnation in the growth of wages for college graduates in the last decade that I also find worrying and that he cannot explain with his skill supply-demand model.  I say this because the slow growth of the last decade probably shifted people into college since the opportunity cost of wages is lower and there is evidence that entering the workforce in a bad economy depress yours lifetime wages.  Also, every education cohort has stagnating wages over this period.  It seems to me that the economic elite may have finally managed to siphon off the earning power of the one segment of workers that was able to avoid their vampiric gaze and garner some wage increases over the last few decades.  We will need more data to confirm that, however.

Now inequality stemming from educational attainment is a tricky subject.  At some level I do think that college imparts skills to those who attend.  However, unlike the Science article I am not convinced that learned skills explain the entirety of the wage differential.  After all, the most popular majors for a Master’s degree are Education and Business.  Yet these are exactly the majors that have been shown to learn the least.  Recall that much of the differential is driven by the wage gains of post-graduate degree holders and that Master’s degrees are far more prevalent now than ever before.  Now the article posts a chart showing wages as a function of skill in various countries as if that were enough evidence that it is skills acquired in college driving the wage gap.  Unfortunately, you need two more pieces of evidence: that colleges improve skills and then, together with something like the aforementioned chart, show that the skill increase explains the wage increase.

However, that is not the trickiest part.  I am fairly certain that people that graduate college are in fact more skilled.  But that doesn’t mean that college gave them that skill.  The problem is that the group of college graduates is drawn from a very selective part of the population, at least in the U.S.  Increasingly, students from the top quintile of the income distribution are dominating attendance at good four year universities and almost nobody from the poorest quintile is getting in.  Yes, if you are poor and get into Harvard you get a free ride, but the chances of that are miniscule compared to your wealthier peers.

With that knowledge we arrive at a simple explanation for why the college wage gap has increased, but may not be attributable to college actually teaching anything.  It’s well established that children from families with higher socioeconomic status do better at nearly every conceivable measure.  They are smarter, more ambitious and determined, they have more emotional support (not to mention financial) and they are usually just better adjusted and have all the bourgeois values we find exemplary as a society.  Basically all the perks of being born in a family not just eeking out an existence.  We expect these people to do better in life and earn more income and these are the same people that overwhelmingly fill college commencements.  Therefore, college may have done little to improve these people and yet we would expect graduates to make more money than their peers without degrees.  Thus, the truly worrying fact here is not the income inequality derived from collegiate attainment but perhaps how we have failed families long before their children are of age to attend college.

But lets say that college does impart skills that explain the wage gap.  This would still suggest to me that the far more worrying fact is how we have gated college admissions by wealth of families.  If only wealthy kids can make it past admissions (on account of their already enumerated advantages) and pony up the money to attend college then we will live in an increasingly stratified society with little income mobility.  If you are poor you can’t go to college to enable you to find a higher paying job and if you are rich, well you get to spend 4 years getting drunk and partying and then earn more money than your less well-endowed peers.  In fact, among the OECD the U.S. has one of the lower income mobilities and this inequality of access to higher education is surely contributing to that sad statistic.

In order to truly settle this question we really need to look at the same cohort of people, with similar grades, family wealth and all the other factors that go into your success as a human being.  Then we need to divide them into a group that goes to college and those that do not and compare their wages.  At which point we can finally settle if college is in fact the source of the college wage gap.  It would still not sort out whether that is because of skills or credentials, that would require the research path I already outlined above.

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