Real income vs educational level- a problem for higher education

An article in Foreign Affairs, and recent reports from the Pew Trust and ETS all have recently made similar, and very important, points about education and the American economy.  The first article talks about falling real wages and the relationship to protectionism; the Pew Trust looks at decreasing economic mobility in the US, and ETS considers the impacts on the US of a “perfect storm” of divergent skill distributions, the changing economy, and demographic trends.  Taken together, these reports raise some important questions for higher education.

Kenneth F. Scheve and Matthew J Slaughter, writing in the July/August 2007 issue of Foreign Affairs, discuss generally falling wages in the US, and their connection with increasing protectionism.  They point out that real income growth recently has skewed significantly in favor of high earners, with a strong correlation to educational level. They report:
Less than four percent of workers were in educational groups that enjoyed increases in mean real money earnings from 2000 to 2005; mean real money earnings rose for workers with doctorates and professional graduate degrees and fell for all others....Even college graduates and workers with nonprofessional master’s degrees saw their mean real money earnings decline.
In particular, the mean real earnings of college graduates fell by almost 4% between 2000 and 2005, while the mean real earnings of the MBA, JD, MD group rose by about 10%.  Hardest hit, not surprisingly, were high school dropouts, whose mean real earnings dropped by about 5% over that time period.

Although Scheve and Slaughter argue that the actual mix of reasons for this stagnation in real income is not yet clear, their research indicates that workers perceive that globalization has put pressure on real wages. Since the data of Scheve and Slaughter shows that over 96% of workers are in categories that have seen a decrease in mean real wages over the past few years, it should therefore not be surprising that there is increasing public support of protectionism.  Scheve and Slaughter make a persuasive argument that major policy changes will be required if globalization, with its very significant broad societal economic benefits, is not to be reversed.  These policy changes must result in a less skewed distribution of the financial benefits of globalization, such that a significant majority of workers benefit from increased liberalization of borders.

Similar data is behind a very thought provoking report of the  Pew Charitable Trust entitled Economic Mobility: Is the American Dream Alive and Well? This report begins with the observation:
For more than two centuries, economic opportunity and the prospect of upward mobility have formed the bedrock upon which the American story has been anchored
and then turns to the question of whether that dream coincides with reality today.

This report addresses the question posed in the title by looking at intergenerational mobility - the rate at which children move up or down the economic scale compared to their parents generation. It looks at both absolute mobility, in which improving economic conditions increase everyone’s economic situation, and relative mobility, in which some people or groups do better than do others.  It is relative mobility that is most important in defining people’s perspectives regarding the “meritocracy” of the economic system.   

The report notes that most studies show that in the US, about half the advantages of having a parent with high income are passed on to the next generation.  That is, one of the best predictors of the financial success of the child is the financial success of the parent.  In fact, contrary to what most might imagine to be the case, data in the  report shows that relative mobility now is higher in France, Sweden, Germany, Canada, Finland, Norway and Denmark than it is in the US!

The data on absolute mobility is consistent with that of Scheve and Slaughter.  The Pew report makes two generational comparisons of men in their 30s: one between men who were in their 30S in 1964 and the generation-later group of men in their 30s in 1994; and a similar comparison taken between 1974 and 2004.  The earlier group showed a 5% increase in median real  income over the 30 year period.  The later group showed a 12% decrease in median real income over a 30 year period.  Thus there was absolute mobility for the earlier generation, but not for the later. 

Median family income showed a somewhat different, but not unrelated, story when looked at in a similar, generational, way.  The increasing entry of women into the workforce led to a significant increase of 32% in median real family income during the period generational period 1964-1994.  However, looking again at the later generational period, 1974-2004, one finds that the growth in median real family income is only 9%.   

The report also provides a striking chart comparing productivity and median family income growth from 1947 to 2005.  From 1947-1974 hourly productivity and median family income grew at almost exactly the same rate. From roughly 1974-1997, the hourly productivity continued to grow at more or less the same annual rate as in the earlier period, but median family income grew at a much slower rate.  Beginning in roughly 2000, hourly productivity began to grow at an even faster rate, while median family income began to decrease, consistent with the findings of Scheve and Slaughter. One can imagine that, over this time period, capital investments in technology, etc became an increasingly important component of productivity increases, thus explaining the disconnect between productivity and family income.   However, as the report notes with some understatement:
As the data....indicate, the benefits of productivity growth have not been broadly shared in recent years.

Earlier in the year, the ETS published a report called America’s Perfect Storm: Three Forces Changing the Nation’s Future. The three forces are divergent skill distributions, the changing economy, and demographic trends.   This report also raises concerns that the “perfect storm” is moving the US away from a society in which social  mobility is robust to one in which we have an “inherited meritocracy”. For the purposes of this post, I will only note some results regarding the changing economy, but the entire report is powerful and deserves reading in its entirety.   

This report shows the positives of getting a bachelors degree or higher, while at the same time reflecting the concerns of the other two reports regarding trends in real income. The report notes that the growth of the knowledge industry has increased significantly the differential in lifetime earnings between someone with a bachelors degree and a peer having only  a high school diploma.  In 1979, the former had expectations of a mean lifetime income 51% higher than the latter, while by 2004 the mean lifetime income benefit of a bachelors degree had grown to 96%.  The 2004 mean lifetime earnings differential between the bachelors recipient and the high school graduate was slightly more than  $1.3M.  Thus the bachelors degree is increasingly worth having! 

However, in comparing mean lifetime earnings for different educational levels in 1979 and 2004,  the authors of this report found results similar to those described above.  For those with no high school diploma, mean lifetime earnings dropped by 39% between 1979 and 2004; for those with only a high school diploma, the drop was 24%; for 1-3 years of college, including associates degree, the drop was 13%; for those with a bachelors degree, the drop was 1.2%.  Only the group with Masters or higher showed an increase in lifetime earnings between 1979 and 2004: they saw a rise of 15.2%.

There is also very interesting data presented that showed that college graduates who still had weak literacy and numeracy skills were much more likely to be underemployed- holding lower paying jobs that did not require a college degree - than were their peers with high literacy and numeracy skills.  It is comforting to learn that there remains some correlation between actual acquisition of basic skills and job success- just having obtained a credential is not sufficient!

I will not join the discussion by economists and political scientist regarding whether the growing income discrepancies are good or bad (see, e.g. blogs of Gary Becker, Richard Posner ,Mark Thoma).  Rather, I will focus on a few probably obvious points and questions deriving from these reports that have real pertinence for higher education. 
1.  The fact that 96% of all workers belong to educational groups whose median annual real income is dropping obviously does not mean that 96% of all workers individually are seeing drops in  annual real income. However, it does indicate that a vast majority of individual workers are seeing a decreasing real annual income.  Thus, the pricing strategy of most of higher education that calls for annual net tuition increases in excess of inflation is one that increasingly will be unsustainable for both political and economic reasons.
2.  With data showing that on average a bachelors degree no longer shelters the holder from a decreasing real income, is a private sector bachelors degree still worth something in the vicinity of $200,000?  If not, what is it worth?  It seems likely to me that this information coupled with the concerns of 1. are likely to put real pressure on net price.
3.  The data seem to indicate that “more education “ is the answer.  However, as Alan Blinder has noted in Foreign Affairs (see also Offshoring moves up the education ladder, March 7,2006)
Other things being equal, education and skills are, of course, good things; education yields higher returns in advanced societies, and more schooling probably makes workers more flexible and more adaptable to change. But the problem with relying on education as the remedy for potential job losses is that "other things" are not remotely close to equal. The critical divide in the future may instead be between those types of work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not. And this unconventional divide does not correspond well to traditional distinctions between jobs that require high levels of education and jobs that do not.
So just offering “more degrees” is not necessarily the answer- we need to offer skills that are not easily delivered by wire!

In thinking about the real challenges facing higher education, it is clearly critical to do so with a clear understanding of the larger societal trends that put limits on the  possible.  Much  of what we think of as "normal" in higher education today  was defined in a time of rising real incomes.   We face real challenges in adapting to  a world in which that is no longer the case for a significant majority of Americans.

Comments

[DSMorriarty]

It seems to me that years ago people could work their way up the ladder of a company and their experience really meant something. Then the economy changes and companies want what they consider "more for their money". They lay off the worker and hire someone with a degree but no practical experience. I believe that the experienced employee should have the opportunity to improrve their education before being laid off and I also feel that a person who has more education should be given a chance. There is a dilemma in this situation and I am not sure the answer?

[Web Hosting]

Even i don't think the system is flexible, but it should be...Rules.. they are every where..

[Andy]

I think that the diploma is a proof of someone's education, intelligence, etc. But life is so complicated and there are so many cases when an employee without a diploma is more effective than one with a diploma. Unfortunately, the law often creates obstacles for those who didn't have a chance to earn their diploma some time ago but managed to gain enough life experience afterwards. I don't think that our education system is flexible enough to take such situations into account. Also, the employers are tied up by the rules that don't allow them to be flexible either.

Andy Moore
School Teacher
http://dalloway-school.com