Higher college attainment will raise wages but not narrow income gap
Apr 23, 2014 | By Marisol Cuellar / commentary and Hans Johnson | 5 Comments
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:
- 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.
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.