Higher returns on education can’t explain growing wage inequality

Posted: March 27, 2019

Steep and rising wage inequality is too often blamed on growing demand for workers with higher levels of educational attainment—the more schooling you have, the more you’ll be paid. But our research shows the rising gulf in pay has little to do with rising returns to education.

A prevalent story explains wage inequality as a simple consequence of growing employer demand for skills and education—often thought to be driven by advances in technology. According to this explanation, because there is a shortage of college-educated workers, the wage gap between those with and without college degrees is widening. The expected boost to workers’ pay from a four-year college degree is known as the “college premium.”

Despite its great popularity and intuitive appeal, this story about recent wage trends driven more and more by a race between education and technology does not fit the facts well, especially since the mid-1990s. The growing inequality of note is that between the top (or very top) and everyone else. The pulling away of the very top cannot be explained by education differences, but rather the escalation of executive and financial sector pay.

Even when looking at the relative changes in the 95^th percentile of wage earners compared to the 50^th percentile of wage earners, and comparing that gap with the college wage premium from 2000 to 2018, it is clear that gains in the college wage premium have been very modest and far less than the continued steady growth of the 95/50 wage gap. Therefore, it is highly implausible that the growth of unmet employer needs for college graduates has driven wage inequality.

The evidence suggests the demand for college graduates has grown far less in the period since the mid-1990s than it did before then. This is difficult to square with contentions that automation or changes in the types of skills employers require have been more rapid in the 2000s than in earlier decades. Rather, automation has been slower in the recent period than in earlier decades as seen in the pace of productivity, capital, information equipment, and software investment—and in the speed of changes in occupational employment patterns.

The first figure below compares the change in the college wage premium over 1979–2000 and 2000–2018 with the change in the log 95/50 wage gap. The college wage premium is the percent by which average hourly wages of four-year college graduates exceed those of otherwise equivalent high school graduates, controlling for gender, race and ethnicity, age, and geographic division. The 95/50 wage ratio is a representation of the level of inequality within the hourly wage distribution, comparing how much more the 95th percentile worker is paid relative to the 50th percentile worker. Both wage gaps are measured in log changes and shown as annual changes.

Notes: Sample based on all workers ages 16 and older. The college wage premium is the percent by which hourly wages of four-year college graduates exceed those of otherwise equivalent high school graduates. The regression-based gap is based on average wages and controls for gender, race and ethnicity, education, age, and geographic division. The log of the hourly wage is the dependent variable. The 95/50 wage ratio is a representation of the level of inequality within the hourly wage distribution. It is logged for comparability with the college wage premium.

The figure shows that the regression-adjusted college wage premium grew rather quickly between 1979 and 2000 then rose at a much slower rate in the 2000s, about as tenth as much. It had already slowed considerably by the mid-1990s, as noted above. In contrast, the 95/50 wage gap grew somewhat faster in the more recent period. When we compare the relative size of the changes in each gap from 2000 to 2018, it is clear the very modest gains in the college wage premium in recent years have not been large enough to plausibly drive the continued steady growth of the 95/50 wage gap. In fact, the log 95/50 wage gap grew 10 times faster than the college premium over this period.

Between 1979 and 2000, the log 95/50 wage ratio and the regression adjusted college wage premium grew at roughly the same pace. Increased employer demand for education as a prime driver of inequality appeared to be a more plausible story then. As we see in the latter period, the growth in the college wage premium cannot explain the growth in inequality and therefore the correspondence in the earlier period also shouldn’t be over-interpreted as education driving the 95/50 wage gap. The truth is there were other factors in the economy driving both slower median wage growth as well as the college premium such as the decline in unionization, allowing for excessive unemployment, globalization, and the fact that the overtime threshold was allowed to wither.

The more salient story between 2000 and 2018 is not one of a growing differential of wages between college and high school graduates, but one of growing wage inequality between the top (and the tippy top) relative to the vast majority of workers. Wage inequality is driven by changes within education groups (among people with the same education) and not between education groups. From 2000 to 2018, the overall 95th-percentile wage grew over three times faster than wages at the median (25.1 percent versus 7.0 percent). Among college graduates, there has been a significant pulling away at the very top of the wage distribution. The figure below shows the change in college wages from 2000 to 2018 for various deciles of the college wage distribution.

As shown, the bottom 60 percent of those with a college degree still have lower wages than they did in 2000. The 50th-percentile wage among those with bachelor’s degrees was 2.4 percent lower in 2018 than it was in 2000, while the 90th-percentile wage of those with bachelor’s degrees was 9.8 percent higher. (The 95th wage percentile for college graduates is fraught with “top-coding” issues making it difficult to obtain reliable measures of high-end wages and wage growth, as discussed in The State of Working America Wages). What’s clear from the data is that less than 40 percent of college-graduate wages have experienced any growth since 2000.

Between 2000 and 2018, the median high school wage also fell (-1.5 percent), while the 95th percentile high school wage grew 7.1 percent. If we compare (raw) high school and college wages at the middle of each distribution, we see that median college wages are no higher than high school wages in 2018 than they were in 2000. If anything, the gap actually narrowed ever so slightly between 2000 and 2018.

Increases in inequality over the last 18 years clearly cannot be explained away by claims that employers face a growing shortage of college graduates and that, correspondingly, wage inequality is some unfortunate side effect of the positive gains from automation that we neither can nor would want to alter. There are plenty of good reasons to provide widespread access to college educations and skill development, but expanding college enrollment and graduation is not an answer to escalating wage inequality.

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Reposted from EPI

Posted In: Allied Approaches