Increasing Education: What it Will and Will Not Do for Earnings and Earnings Inequality (2023)

Mainstream labor economists as well as several public commentators have argued that trends in the economy over recent decades—including technological developments, globalization, and trade, among others—have weakened the relative earnings power of those with lower levels of skills, especially those without a college degree. In recent decades, the earnings of those with a college degree or more have risen steadily, while the wages of those with lower levels of education have stagnated or fallen. Furthermore, lifetime earnings of workers with a college degree are nearly twice as high as those without one, a point made by a number of previous Hamilton Project analyses, including one from this past year [1].

This line of reasoning leads to the view that to further the goal of widespread economic prosperity, it will be imperative to increase the skill level of many in the population, a position that a subset of us (Hershbein and Kearney) took in a recent Hamilton Project framing paper. Other commentators have objected that education is not the answer to the nation’s inequality challenge. Following up on remarks made at a recent Hamilton Project event, one of us (Summers) noted in a Washington Post interview that “to suggest that improving education is the solution to inequality is, I think, an evasion.” In this essay we clarify the different elements of the public debate and note explicitly that these positions are not necessarily at odds.

We have empirically simulated what would happen to the distribution of earnings if one out of every ten men aged 25–64 who did not have a bachelor’s degree were to instantly obtain one—a sizeable increase in college attainment. We focus on men not because women are unimportant—they clearly are important to the workforce—but because low-skilled men have seen the largest drops in employment and earnings over the past few decades, and are now considerably less likely to attend and graduate from college. We focus on college attainment because the data are readily available, but we acknowledge that it is an imperfect measure of skills, perhaps increasingly so. Despite these caveats, this empirical exercise is illuminating and sheds much needed light on an often-muddled public debate. Our analysis leads to three main takeaway points:

  1. Increasing the educational attainment of men without a college degree will increase their average earnings and their likelihood of being employed.
  2. Increasing educational attainment will not significantly change overall earnings inequality. The reason is that a large share of earnings inequality is at the top of the earnings distribution, and changing college shares will not shrink those differences.
  3. Increasing educational attainment will, however, reduce inequality in the bottom half of the earnings distribution, largely by pulling up the earnings of those near the 25th percentile.

These observations will not come as a surprise to most labor economists. Those of us who argue for the imperative of increasing skills are not staking out that position because we believe it will close the gap between the rich and the middle—or between the exorbitantly rich and the merely rich. Rather, we take that position because higher levels of skills will improve the economic position of those around and below the middle of the current earnings distribution. On average, more education does translate into more-valuable skills, and the results of our simulation exercise support that view. At the same time, they make it clear that increasing the share of working-age men that have college degrees will do very little to decrease the overall level of earnings inequality.

A Simulation Exercise

We conduct a simulation exercise to examine how the distribution of earned income would change if 10 percent of non-college educated men aged 25 to 64 were to immediately obtain a bachelor’s or advanced degree. To be clear, this would be a tremendous accomplishment. It is only slightly less than the observed increase in the college share over the entire 34-year period of 1979 to 2013. Furthermore, we apply this increase in educational attainment to workers regardless of age. Education policy that would tend to increase college attainment only for those newly entering the workforce would have different effects. This should be kept in mind when interpreting the simulated effects.

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We carry out our analysis using the 1980 and 2014 March Current Population Survey (CPS) and we count as earned income wages and salary as well as own business income [2]. We draw from the actual distribution of annual earnings of individuals with a college or advanced degree to randomly assign these observed earnings to the new graduates. We incorporate a predicted reduction in the college wage premium in response to the increase in the relative share of the workforce with a college degree. We allow the new graduates to come from anywhere in the non-college educated distribution, meaning that we do not focus on those individuals who are closest to obtaining a college degree. This will have the effect of overstating any potential reduction in inequality.

The first two rows of Table 1 report selected percentiles of the inflation-adjusted earnings distributions for all men ages 25 to 64 in both 1979 and 2013. Notably, earnings at the 10th percentile are 0 in both years—these men did not work at all. The rise in inequality over this period is evident from the declines in earnings at the 25th and 50th percentiles, and the rise in earnings at the 75th and 90th percentiles. The changes were particularly pronounced at both ends of the distribution: earnings at the 25th percentile fell by more than half and earnings at the 90th percentile increased by one-third.

Although not shown in the table, the sharp decline in earnings at the bottom of the distribution reflects a lower likelihood of men having been employed at any point during the year; this likelihood fell from 81.6 percent in 1979 to 77.9 percent in 2013. What’s more, this decline was entirely concentrated among men without a bachelor’s degree (80.2 percent to 73.9 percent).

The third row of Table 1 shows the counterfactual case if one-tenth of the men without a college degree were to be given one, raising the share with at least a bachelor’s degree from 32 percent to 39 percent. The results indicate that earnings rise across the board, but particularly so in the bottom half of the distribution. Earnings at the 25th percentile increase from $6,100 to $8,720, and median earnings increase from $34,000 to $37,060. This is enough to nearly erase the decline in median earnings between 1979 and 2013, and cut the decline at the 25th percentile by one-third.

Although earnings also rise at the 75th and 90th percentiles, the proportional increases are smaller, and it is worth noting that the absolute gain at the 90th percentile is smaller than the absolute gain at the 25th percentile.

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Table 1: Simulated effects of increasing college share on earnings distributionIncreasing Education: What it Will and Will Not Do for Earnings and Earnings Inequality (1)

Having shown the effects of an increase in college attainment on earnings at various points in the distribution, we now turn to an examination of the impact on inequality. Increasing the share of the workforce with a college degree will have two offsetting effects on inequality. One effect will be to decrease the wage gap between those with and without a college degree, as noted above. All else equal, this will lead to a reduction in earnings inequality. However, as a group, college graduates have a wider earnings distribution than those with lower levels of education, which will lead to an offsetting increase in earnings inequality.

A summary measure of inequality that accounts for differences throughout the entire distribution is the Gini coefficient, an index that ranges from 0, if everyone has the same earnings, to 1, if a single person has all the earnings and everyone else has none. (To interpret changes in the Gini, note that under this measure of inequality, if everyone’s income increases by the same proportion, the Gini stays constant. If income increases by a larger percent at the high end, the Gini will rise.) An alternative index is the Theil index, which statistically measures the entropic "distance" of the current distribution from one in which everyone has the same income. As with the Gini, the Theil equals 0 if everyone has the same earnings; the closer the index is to 1, the more distance there is from the egalitarian position.

Table 2: Simulated results on overall earnings inequality: Gini coefficient and Theil index
Increasing Education: What it Will and Will Not Do for Earnings and Earnings Inequality (2)

Table 2 shows the Gini coefficient and Theil index from the actual earnings distributions from 1979 and 2013, as well as from our counterfactual earnings distribution. Consistent with the pattern of changes in Table 1, these indices clearly show the increase in earnings inequality over the last three decades. However, they also make clear that overall earnings inequality would hardly change—and would not come close to 1979 levels—if the share of working-age men with a college degree were to increase by even a sizable margin.

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Labor economists often examine the wage or earnings distribution by looking at ratios of different percentiles. Percentile earnings ratios have the advantages of being relatively simple to calculate and understand, and they show what is happening at different points in the earnings distribution. Several of these earnings ratios are shown in Table 3, both from the actual distributions from 1979 and 2013, and the counterfactual distribution from 2013. For example, the number in the first row and first column indicates that in 1979 someone at the 50th percentile, or median, of the earnings distribution, had earnings 2.64 times that of someone at the 25th percentile.

Table 3: Simulated effects of increasing college share on wage percentiles ratios
Increasing Education: What it Will and Will Not Do for Earnings and Earnings Inequality (3)

As we saw in Tables 1 and 2, earnings inequality increased substantially between 1979 and 2013, and this is reflected in each ratio rising considerably. However, the results of our counterfactual exercise demonstrate that increasing the share of college graduates from 32 percent to 39 percent would reduce many of these earnings ratios substantially. In particular, the three left-most ratios in Table 3, which measure inequality relative to the 25th percentile, fall by about one-third from their actual 2013 levels, and get about half-way back to their 1979 levels. These declines in part reflect the relatively large proportional increase in earnings at the 25th percentile under the counterfactual ($8,720 / $6,100 = 43 percent increase).[5]

In contrast, the p75/p50, p90/p50, and p90/p75 ratios fall only slightly, suggesting that the counterfactual does not significantly change inequality in the top half of the earnings distribution. These ratios all decline by less than 10 percent. Put differently, the increase in the share of college-educated workers benefits men with earnings at or above the median about the same in proportional terms.

Conclusion

In this analysis we have simulated the effects of increasing the college attainment of working-age men to illustrate the likely effects on earnings and earnings inequality. Our empirical simulation supports the following general observations:

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  1. Increasing the educational attainment of men without a college degree will increase their average earnings and their likelihood of being employed.
  2. Increasing educational attainment will not significantly change overall earnings inequality.
  3. Increasing educational attainment will, however, reduce inequality in the bottom half of the earnings distribution, largely by pulling up the earnings of those near the 25th percentile.

Our nation should aim to increase the educational attainment and, more generally, the skills of less-educated and lower-income individuals because in the long-run, this is almost surely the most effective and direct way to increase their economic security, reduce poverty, and expand upward mobility. An important observation to make on this point—not captured by the empirical analysis above—is that increasing skills does not simply mean increasing the attainment of bachelor’s degrees. Increasing skills will also mean improving K-12 education and providing more training and human capital development in the specific skills demanded by the labor force.

On the other hand, additional and separate measures will be needed to address rising levels of overall inequality, which, as we have shown, is mostly driven by changes at the top of the distribution. These are distinct, albeit interrelated challenges, and the public discourse would be much improved if it stopped conflating them.

Oreopoulos and Petronijevic (2013) review the academic research on the issue and conclude that the evidence clearly suggests that higher levels of education yield substantial wage and employment benefits. Some scholars, including Beaudry, Green, and Sand (2013), have argued that the growth in the return to measured skill (education) has slowed in recent years. Nonetheless, the skill and education premium is still very large.

The March CPS asks about income from the previous calendar year, so our analysis refers to income earned in 1979 and 2013.

[3] Technical note: To incorporate this relative wage response into our simulation exercise, we have drawn on the academic literature for an estimate of such a wage elasticity: we assume that the wage premium of college-educated workers decreases by 6 percent when the relative supply of college-educated workers increases by 10 percent. This relative wage elasticity comes from the consensus estimates of Autor and Acemoglu (2010), who compare college graduates to high school graduates. (Our exercise compares men without a bachelor’s degree to those with a bachelor’s degree or more, which is somewhat broader than the educational groups used in Autor and Acemoglu.) In our exercise, we effectively change the share of men with a college degree or more from 31.8 percent to 38.9 percent (this approximately 7 percentage point difference is about one-tenth of the 68.2 percent of men who did not have at least a college degree.) Thus our exercise increases the relative supply of the college-educated from (0.318/0.682) to (0.389/0.611), or by more than 30 percent. This implies the wage premium falls by more than 18 percent (0.6 * 30). For reasonable values of the model parameters in Autor and Acemoglu (2010), the change in the wage premium is approximately evenly split between the two groups, and this is what we incorporate into our exercise, with wages of the college-educated falling by about 9 percent and wages of the less-than-college-educated rising by 9 percent. (To keep things relatively simple, we assume a constant proportional earnings change across the distribution.)

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[4] Earnings have been adjusted to year 2013 dollars using the personal consumption expenditures (PCE) deflator from the Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm, Table 1.1.4).

[5] If our simulations do not allow for the change in relative wages owing to changes in relative supply, the ratios do not decline by quite as much. Specifically, under that alternative counterfactual, the 50th/25th ratio is 4.37; the 75th/25th ratio is 8.13; and the 90th/25th ratio is 11.69.

FAQs

What happens to income when education increases? ›

The relationship between education and income is strong. Education is often referred to as an investment in human capital. People invest in human capital for similar reasons people invest in financial assets, including to make money. In general, those with more education earn higher incomes (see the table).

Does education reduce income inequality? ›

Education is arguably one of the primary factors that cause income inequality. Recent studies show that the earnings gap between workers with a Bachelor's or more advanced degree and workers with a high school diploma has been widening.

What is the importance of education as a tool in solving social inequalities? ›

• Supporting democratic societies.

Education can help tackle gender disparities in wages, poverty, reproductive autonomy and political power. It can dramatically improve the health outcomes for women and their children.

How does education create inequality? ›

Educational inequality is the unequal distribution of academic resources, including but not limited to; school funding, qualified and experienced teachers, books, and technologies to socially excluded communities. These communities tend to be historically disadvantaged and oppressed.

How does higher education affect the economy? ›

Education tends to raise productivity and creativity, as well as stimulate entrepreneurship and technological breakthroughs. All of these factors lead to greater output and economic growth.

Does education really have an impact on my future earnings? ›

As the chart shows, the more you learn, the more you earn. Median weekly earnings in 2017 for those with the highest levels of educational attainment—doctoral and professional degrees—were more than triple those with the lowest level, less than a high school diploma.

How does education reduce economic inequality? ›

It allows social mobility, giving the opportunity to an initially non-educated individual to change his/her social status with better earning op- portunities than his/her parents. Education makes it easier to acquire new skills, increase individual productivity, and promote career change toward well-paid jobs.

Does higher education reduce inequality? ›

A new research paper and policy brief find that targeting this gap with small increases in the share of workers with college degrees can reduce inequality and poverty.

What is the best way to reduce income inequality? ›

Governments can reduce inequality through tax relief and income support or transfers (government programs like welfare, free health care, and food stamps), among other types of policies.

How can we solve the problem of inequality in education? ›

How To Reduce Inequality In Education?
  1. Provide Books to Low-Income Families. ...
  2. Exposing Individuals to Free Resources. ...
  3. Building in More Flex Time. ...
  4. State Government Should Develop More Major Projects And Resources. ...
  5. Access To Literacy Resources and Tutors. ...
  6. Closing The Digital Divide. ...
  7. 'Equitable' Funding For Underfunded Schools.

Is education the answer to inequality? ›

Put more bluntly, education is regularly regarded as a panacea for addressing poverty and inequality, despite being bound up in the same reproductive processes caused by poverty and inequality.

What are the importance of social equity and equality in education? ›

Equality in education is necessary for students to have the same opportunities to start off with positive educational outcomes, and equity helps to make sure those equal opportunities are adjusted to make room for students who might need extra help and attention.

How does education affects inequality to an individual? ›

Education has the potential to reduce inequalities and promote social mobility. However, children from lower socio-economic backgrounds continue to do significantly worse at school than those from higher socio-economic backgrounds.

What is an example of inequality in education? ›

For instance, students from economically poor families are more likely to attend schools characterized by worse infrastructure, fewer qualified teachers, less ambitious peers and outmoded pedagogical practices compared with those in more affluent areas. Hence they are more likely to end up with lower learning outcomes.

Why is education an inequality? ›

Education disparity has been further exacerbated by the unequal allocation of opportunities based on social class and caste. One of the main causes of educational inequality in India is the caste system. India is a diverse nation with many different social groupings, each with its own set of ideals and principles.

What is the impact of higher education? ›

Societal benefits include: Higher levels of education correspond to lower levels of unemployment and poverty, so in addition to contributing more to tax revenues than others do, adults with higher levels of education are less likely to depend on social safety-net programs, generating decreased demand on public budgets.

What effects does higher education have on society? ›

Benefits of Education are Societal and Personal. Those who get an education have higher incomes, have more opportunities in their lives, and tend to be healthier. Societies benefit as well. Societies with high rates of education completion have lower crime, better overall health, and civic involvement.

What are the benefits of getting higher education? ›

Personal benefits
  • Higher salaries and employability (Financial benefits) ...
  • Career specialization and preparation. ...
  • Personal development. ...
  • Socializing and networking. ...
  • A happier and healthier life. ...
  • Poverty reduction. ...
  • Environmental benefits. ...
  • Promotes good citizenship and reduces crime.
8 Jul 2021

What impact does education have on employment? ›

Unemployment rates are higher among people who do not have an upper secondary education (14% on average across OECD countries) than among those who have a tertiary education (5%). People with at least an upper secondary education are more likely to have a job than those without this level of education.

How does education increase individual earnings? ›

Higher levels of education usually translate into better employment opportunities (see Indicator A3) and higher earnings. The potential to earn more and see those earnings increase over time, along with other social benefits, is an important incentive for individuals to pursue education and training.

How does education impact your career? ›

You gain knowledge, skills and experience to help you both in your career and in life in general. On top of that, by gaining additional skills in communication and problem solving and achieving your goals, you can also increase your confidence.

What are some ways to reduce inequality? ›

Improving access to roads, communications and markets can have a great impact on reducing poverty and opening opportunities for marginalized groups. Moreover, decentralization of public services, offices and industries can promote shared prosperity among regions by preventing regional poverty pockets.

Why is it important to reduce economic inequality? ›

Inequality threatens long- term social and economic development, harms pov- erty reduction and destroys people's sense of fulfilment and self-worth. This, in turn, can breed crime, disease and environmental degradation.

What measures we can take reduce the inequality in society? ›

Reforms in workers' laws can reduce inequalities. Minimum wages and universal basic income (UBI) are two of the popular ways to reform workplace laws. They both have the same aim — raising incomes of the least fortunate to reduce the income gap. These are imposed by law and paid by the employer.

How can schools and teachers help to reduce social inequalities in educational attainment? ›

Try different ways of organising groups of students in the classroom. Rather than creating separate activities based on a preconceived idea of ability, students could work through tasks with differing levels of challenge. This allows them to think about what they can achieve and does not label anyone incapable.

Why is education important for equality? ›

Educational Inequality is also about race and gender. Those who are less privileged are condemned to poverty and unemployment because of a lack of quality educational resources. Without a sound education, people have less knowledge of the world around them or the issues facing their communities.

What is the role of education in equality? ›

Education is one the effective means through which any society can strive for social equality or at least make an effort to reduce social inequalities among their members. It is simply because education promotes social mobility among its members.

Why is education needed for equality? ›

Equity in education matters. It is the hallmark of a fair and just society, it is the vehicle by which people can improve their long term health, wealth and wellbeing and it is an issue that matters to the ACT community.

How can social inequality affect education? ›

Poverty and persistent social and economic inequalities contribute to differential school access and learning, which often carries over after schooling to unequal economic outcomes and political empowerment.

Is there any inequality in education? ›

Hours worked have fallen disproportionately more on women. Education opportunities have been lower and, also, dramatically unequal. Most countries have made heroic efforts to put remote learning strategies in place. But the quality and effectiveness are varied, and low.

What are the three main causes of inequality? ›

Statement 2: Poverty, social discrimination and lack of resources are the key reasons why the lives of people in India are highly unequal.

What can cause inequality? ›

Some of key factors behind the increase in within-country income inequality noted in the literature include technological progress, globalization, commodity price cycles, and domestic economic policies such as redistributive fiscal policies, labor and product market policies.

How does education improve income distribution? ›

Education makes it easier to acquire new skills, increase individual productivity, and promote career change toward well-paid jobs. However, un- equal access to education and unequal post-graduation opportunity could adversely impact Page 5 income inequality and increase it.

What is the relationship between income and education? ›

The relationship between income and education level is that people who have a higher education level have a higher income level. It has been found that the higher the education level, the lower the unemployment rate.

Does education level correlate with income? ›

The short answer is: Yes! Advancing in your education does typically lead to higher annual and lifetime earnings, at all levels of education.

How does education level and age affect income? ›

Individuals with higher levels of education typically have higher paying jobs, and consequently, greater financial resources; this may increase the likelihood of healthy aging by enabling individuals to access better health care or to reside in better neighbourhoods [6].

How does education contribute to the economy? ›

Education builds human capital; it increases individuals' capabilities, enhancing economic productivity and facilitating the development and adoption of frontier technologies. In such a context, highly educated individuals enjoy a large premium in employability and earnings.

How does education affect the pay gap? ›

Despite equal educational attainment, the salary gap between men and women persists. According to the graph, male bachelor's degree holders make roughly $3,400 more than females with identical credentials. Males with a master's degree or higher earn an average of $9,500 more than females with comparable degrees.

Can higher education reduce inequality in developing countries? ›

At the same time, the global economy is becoming increasingly knowledge-driven. Hence, investment in vocational and higher education is important for developing countries to remain competitive; further, expanding the skill-base of the labor force may lead to lower levels of wealth inequality.

How does education affect employment? ›

Our results indicate that education significantly increases re-employment success among the unemployed. We also find evidence that additional post-secondary education reduces unemployment incidence, but additional secondary schooling does not reduce the probability of becoming unemployed.

How does education affect economic growth and development? ›

Education pays

The value of human capital – the share of human capital in total wealth – is 62 percent. That's four times the value of produced capital and 15 times the value of natural capital.

What is the relationship between education and employment? ›

Education can provide individuals with the necessary market skills to gain high employability at a global setting and to be relevant in the economy. In this respect many researchers (Huseyin, 1998; Harvey, 2000;gbsn, 2013) found the strong long run relationships between education and employment.

How does education affect low income families? ›

Parents with less education are losing economic ground.

The percent of children in low-income families increased from 65% to 73% if parents had less than a high school diploma. The percent of children in low-income families increased from 34% to 46% if parents had a high school diploma, but no college.

Does more education mean more money? ›

Men with bachelor's degrees earn approximately $900,000 more in median lifetime earnings than high school graduates. Women with bachelor's degrees earn $630,000 more.

How does level of education affect poverty? ›

Education is often referred to as the great equalizer: It can open the door to jobs, resources, and skills that help a person not only survive, but thrive. This is why access to quality education is a globally-recognized solution to poverty.

What is the effect of greater education about aging? ›

The benefits of good education and lifelong learning extend into old age. The initial findings of a long-term study show that certain degenerative processes are reduced in the brains of academics. Their brains are better able to compensate age-related cognitive and neural limitations.

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