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What increasing education will and will not do for earnings and earnings inequality

June 17, 2015

 A Response to the Washington Center for Equitable Growth’s Marshall Steinbaum and John Schmitt.

In an essay posted on the Hamilton Project website in March, we empirically simulated what would happen to the distribution of earnings if one out of ten men aged 25–64 who did not have a bachelor’s degree were to instantly obtain one—a very large increase in college attainment. Our essay made the point that this extraordinary boost in college attainment would do very little to change the overall level of income inequality, but it would significantly reduce inequality in the bottom half of the earnings distribution, largely by pulling up the earnings of those near the 25th percentile. The bottom line was that increasing educational attainment is an effective approach for improving the economic security of those with low wages, but nobody should think it is the right policy lever if the goal is to address the rise in overall inequality, which is largely being driven by increases at the top.

Last month, Marshall Steinbaum and John Schmidt posted an essay on the website of the Washington Center for Equitable Growth arguing that our analysis “is too sanguine, however, with respect to non-college-educated workers.” Their essay maintains that not only is education not a solution to overall inequality, but it also does not appreciably improve inequality or economic potential at the bottom. They contend that two assumptions underlying our simulation are faulty: (1) our assignment of college wages to an arbitrary set of newly–minted, bachelor- degree holders, and (2) our adjustment of relative wages to reflect the changing education composition of workers, such that college wages fall slightly and non-college wages rise slightly.

Their observations are duly noted, and we are grateful that they have pushed us to elaborate on our thinking. We take this opportunity to emphasize that our point was that even under optimistic assumptions and looking at the long run, increasing educational attainment is not a silver bullet to addressing the inequality challenges our nation currently faces. In addition, we would like to remind readers that bolstering the economic security of those at the bottom and addressing overall inequality levels are distinct, albeit related challenges. Our nation needs a multi-pronged policy response. We suspect the WCEG authors will agree with us that improving both the quantity and quality of education that Americans receive is something that should be pursued. Yet at the same time, we readily acknowledge that that alone is insufficient.

As to the specifics of their arguments, with regard to the first assumption, there is no disagreement: our essay explicitly acknowledges that the simulation may overstate the reduction in inequality at the bottom because we assumed that the “new” college graduates could come from anywhere in the non-college-educated distribution. This was the conservative (in the cautious sense) assumption to make to give education the best chance of reducing overall inequality. A more likely scenario, of course, is that “new” graduates would come from among college dropouts, which would have less impact on wages than if we managed to bring high school dropouts up to the level of skills typical of a bachelor’s degree holder.

Steinbaum and Schmidt’s second critique is more fundamental. They contend that the labor market is not operating at full employment and therefore that we should not expect any change in relative wages for college- and non-college-educated workers. The insight that relative wages adjust to the supply and demand of workers with different levels of education is at the heart of dozens of academic papers exploring trends in wages over the past four decades. It is a leading explanation for why the “college wage premium” (i.e., the wages of those with a bachelor’s degree relative to those without one) increased so dramatically during the 1980s and 1990s. This research explains how labor markets have worked historically, and there is no reason to conclude they will not continue to work this way again.

It is true, as Steinbaum and Schmidt point out, that a tight labor market is much better for workers and their wages than a slack labor market, and that recessions can cause lasting harm to workers’ economic prospects. (For solid academic evidence on this point, see here.) We share their concern about a weak overall economy being behind many of our current challenges, and indeed, one of us (Summers) made this point in the remarks that started this public dialogue.

But in simulating the effects of educational attainment on wages and inequality, we did not confine our analysis to the special conditions of the worst labor market in several generations. The Great Recession has passed, and investing in education is necessarily a long-term strategy, and by no means an exclusive one. Yes, we also need a stronger macroeconomy for workers—and our economy as a whole—to reap fully the benefits from improved educational opportunities and a more skilled workforce.


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