College & Careers

Higher college attainment will raise wages but not narrow income gap


Marisol Cuellar

Marisol Cuellar Mejia

In both California and the nation, income inequality is at or near record levels. Because educational attainment is by far the single most important determinant of an individual’s income, a key question, then, is whether improvements in educational outcomes can reduce inequality. Unfortunately, for those who argue for policies that will lead to greater levels of educational attainment, the answer is mostly no. This does not mean we should stop pushing for higher levels of education. Indeed, on average, college graduates earn far more in the labor market than do less educated workers. It’s just that the variation in wages for college graduates is quite wide. Inequality at relatively high wages is better than the alternative of low wages for everyone, and improvements in educational attainment will lead to higher incomes on average. But don’t expect to reduce income inequality substantially simply by  increasing the rate of college graduation.

For most people, wages (including salaries and bonuses) are the primary source of income. Increases in wage disparities have been the key driver of the overall rise in income inequality. Education is related to wage inequality in three ways:

Hans Johnson

Hans Johnson

  • First, highly educated workers earn more than less educated workers. PPIC research shows that college graduates have done far better in the California labor market than individuals with less education. For example, workers with a bachelor’s degree earn 57 percent more on average than otherwise similar workers with only a high school diploma. This college wage premium is far higher today than it was decades ago. This rise in wage returns to education explains part of the rise in wage inequality.
  • Second, overall inequality changes as the share of workers with different levels of education changes. If wage differences between college graduates and high school graduates are very wide, but hardly anyone graduates from college, then the effect of education on overall inequality would not be very large. In 1960, only a very small share of working-age adults in California had a college degree. Most workers had no more than a high school degree. Thus, the college wage premium did not affect a lot of workers. But by 2012, education was much more bifurcated, with strong growth at top of the education distribution; the share of workers having at least a bachelor’s degree grew from 12 percent in 1960 to 30 percent in 2010-12. The increase in overall wage inequality mirrors this bifurcation in educational outcomes. Not only did the college wage premium grow between 1960 and 2012, but the share of workers enjoying this premium also went up.
  • Finally, and least well-known, is inequality within an educational category (e.g., wage inequality among college graduates). As more adults have acquired college degrees in California, the value of those degrees in terms of wages has dispersed. For example, in 1980 the most successful workers with a bachelor’s degree (those in the 75th percentile) earned $15 more per hour than the least successful baccalaureates (those in the 25th percentile). By 2012, the difference had grown to $22 – a 47% increase. That is, among workers with a bachelor’s degree in 2012, those at the 25th percentile of the wage distribution earned about $20 per hour, compared to almost $42 per hour earned by those at the 75th percentile. For workers with graduate degrees, the growth in the wage difference has been even more dramatic – from $16 to $33. Wage disparities among high school graduates are also significant, but the wage gap has remained relatively flat over time. However, wage inequality has actually decreased among workers who have not graduated from high school. In other words, wages are most equal among workers who have not graduated from high school, and are least equal among workers with a graduate degree.

Understanding the determinants of wage inequality for highly educated workers requires more research. We know that college graduates in certain majors (for example, engineering and computer science) earn far more than those in less remunerative majors (for example, education and liberal arts), but other factors are also at work. For example, as more adults earn college degrees, the dispersion of abilities among college graduates could be increasing. Other aspects of the labor market, such as global competition and unionization, could differentially affect low-wage and high-wage workers.

 

Chart showing gap in wages

Over the past three decades, the gap in wages between the lowest paid college graduates (bottom 25 percent) and the highest paid college gradates (upper 25 percent) has widened substantially, while the pay range for high school graduates has remained constant. Values reflect the dollar difference in hourly wages between workers at the 75th percentile and the 25th percentile of the wage distribution. Sample is restricted to full-time year-round workers ages 25-64 in California.
Source: Authors’ analysis using microdata from the Center for Economic and Policy Research (CEPR) Uniform Extracts of the CPS Outgoing Rotation Group. The CPS does not provide information on two-year degrees or vocational certificates.

 

At the end of the day, we find that although increases in education will lead to increases in wages, wage and income gaps would remain large. While college degrees are known to increase earnings, there is a significant and growing variation in this wage premium. Getting more students to attend and complete college won’t, on its own, substantially reduce inequality. Improvements in educational outcomes will not eliminate income inequality. Indeed, incomes are more equal among the least educated workers. Of course, equality at low wages is not a desirable outcome.

Marisol Cuellar Mejia is a research associate at the Public Policy Institute of California. Hans Johnson is a Bren Fellow at the Public Policy Institute of California.

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5 Responses to “Higher college attainment will raise wages but not narrow income gap”

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  1. navigio on April 26, 2014 at 9:26 am04/26/2014 9:26 am

    • 000

    Inequality at relatively high wages is better than the alternative of low wages for everyone…

    Why?

  2. John H on April 24, 2014 at 12:29 pm04/24/2014 12:29 pm

    • 000

    Although I appreciate the author’s research and considerations, I’m concerned about our continuing (false) conclusions regarding the relationship between education and income.

    First, I believe the phrase “increases in education will lead to increases in wages” to be incorrect. What we’re really referencicng here are qualifications, not education, and the acquisition of one does not necessarily mean the acquisition of the other.

    Second, we seem to have accepted a false causality here, in that we seem to suggest that it’s the higher qualifications themselves that are the drive force behind a higher income. (If this were true, then surely we could simply print PhDs for the poor and they’d automatically become rich ?). Whilst loan merchants and qualification establishments continue to promote that idea (more quals = more money), it’s to suit their own needs, not those of the underclass, and is inherently misleading.

    Society’s wealth is pyramidal, with the very few (very high) at the top, and the very many (very low) at the bottom. Higher attainment will not in and of itself raise wages for the class. Rather, it simply brings the chance of a possibility that one or two people within a class may themselves move up – but the condition of the class as a whole won’t change.

    Higher qualifications will not of themselves rid the world of underemployment, nor poverty. Only a change in the structure of society can do that. I’d suggest we do the poor a disservice, and only further embolden those that prey upon them, by continuing to insist to the contrary.

    Replies

    • Warren on April 25, 2014 at 5:00 pm04/25/2014 5:00 pm

      • 000

      Right, so the authors are using individual wage data for California residents, controlling for demographics and reporting their findings regarding the real wages of real people. You on the other hand cite no evidence, make a bizarre difference between educational attainment and “qualifications”, and generalize about the “underclass”. Clearly, judging from data cited by the authors and numerous other experts, educational attainment and the subsequent degree you receive (i.e qualifications) increases your skill level and therefore makes you more valuable to employers. As such, if a greater share of individuals in the “underclass” had higher levels of educational attainment they would receive greater wages thereby increasing the earning power of their “class” in general.

      • Floyd Thursby on April 26, 2014 at 1:04 pm04/26/2014 1:04 pm

        • 000

        There is a lot of truth in what John H says. As an individual, you improve your lot by working long hours and hard in school, studying, and teaching your child flash cards and reading from a young age and a willingness not just to do your homework and see if you like school but a determination to work hard no matter what. Asians prove this.

        However, someone will always be on minimum wage and we should raise it. Also, the upper class for the most part is in a position of power and decides who makes how much. They set the wages, make decisions to offshore jobs which hurt innocent people who worked hard for a good education, decide CEO pay and dividends. We’ve made record profits and then not raised wages. Since 2008, 95% of the increase in GDP has gone to the top 1%. If the rich are not more fair with their power, they risk Hilary being upset in the 2016 primaries by someone from the far left like a Howard Dean or someone else, who will vote to increase taxes on the rich, income, inheritance, capital gains, dividends, and hedge fund exemption taxes. We may even see a wealth tax. I generally agree with more redistribution, higher minimum wage, more fairness. The whispers within Washington are that the Republicans are starting to support an increase in minimum wage because they feel they can’t win in 2016 and want to guarantee Hilary as a Centrist Democrat who won’t go too far, and that if they don’t change this 95% stat, and fast, it won’t be Hilary but someone truly progressive running the country and eventually Congress will swing back to the left.

        Clearly the rich are segregating themselves in private schools, avoiding integration and taking more than their fair share of the income pie. We must fight against this. We have the vote.

        • Floyd Thursby on May 1, 2014 at 1:12 pm05/1/2014 1:12 pm

          • 000

          I think this is going to make some difference. If we put less tax money towards prisons and the offense budget (my term for the defense budget based on our recent behavior) and more towards scholarships, it makes a difference.

          The biggest factor in income is education. Those with a degree nearly earn double those with only a high school diploma.

          As an added benefit, those with a degree almost always vote and tend to be progressive with the exception of the highest earning. Democrats would have won almost every election if only those with a degree win. Republicans only win with a combination of the rich, those scared of crime, and social conservatives who are often poor in an unholy alliance.

          If more are educated, as in Europe, we get a more progressive government which will fight to improve education, guarantee middle class teachers who aren’t performing are not protected at the expense of poor children, raise taxes on the rich, raise minimum wage, and increase worker protections.

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