Statistical gaps between groups of people are a constant preoccupation of certain individuals, mostly liberal egalitarians. Two Harvard professors, Claudia Goldin and Lawrence Katz have focused their attention on one of those gaps, namely the gap in earnings between those who have college degrees and those who don’t. They have a new book out, The Race Between Education and Technology and they discuss their views in this Chronicle Review article.
The main question that interests the authors is why the wage gap has grown so much. Around 1970, the average college graduate earned around 45 percent more than a high-school graduate, but today it’s 84 percent. Their explanation is that the gap is caused by the nation’s failure to keep pace educationally. That is, we aren’t putting enough young people through college. Those who do go through college get a very large premium for their superior skills, but those who don’t lag far behind in earnings.
Professor Katz says, “In the early 20th century, we created almost universal access to high school. We have not done the same with college, which essentially we would need to have done to have kept this sort of widespread prosperity present.”
I am all in favor of widespread prosperity, but am not convinced either that the college versus high school earnings gap is a problem or that a system of universal college education would make the slightest bit of difference.
Let’s first examine the offending gap. On the average, people who have college degrees to their name do earn substantially more than people who have only a high school education. That differential has been increasing. No argument on those points. Why, however, should we regard an 84 percent gap as a “problem” while a 45 percent gap is all right?
A salient fact here is that the United States has seen an enormous increase in wealth over the last half century. Individuals with the ideal skill sets can pocket a lot more money now than they could in say, 1958. Here’s one illustration – professional golf. In 1958, Arnold Palmer won his first Masters and pocketed a check for $11,250. Fifty years later, the tournament winner, Trevor Immelman, pocketed $1,350,000 – more than 100 times as much. That isn’t because Immelman is a better golfer than Palmer was, but because top golfers today ply their trade in a much, much wealthier country.
Top golfers earn far more than they used to. So do the top lawyers, doctors, business executives and others with abilities that are highly rewarded. Most of those high earners happen to have college degrees and that pulls up the average earnings of that group. That’s the main reason why the gap is increasing.
The gap is not due to an erosion of earnings and living standards of people who are on the low rungs of the economic ladder. Despite a lot of politically motivated hand-wringing about the plight of Americans who have been “left out” of the nation’s increasing affluence, the fact is that standards of living have been rising across the board, a point demonstrated by Michael Cox and Richard Alm in their book Myths of Rich and Poor.
Therefore, unless you think that increasing inequality is necessarily bad, the reason for fretting about the wage gap disappears. High earners aren’t victimizing low earners.
For the sake of argument, however, let’s assume that there is some reason to reduce the wage gap. Would we accomplish that if, as Katz and Goldin advocate, we adopted policies that would make college education “almost universal”?
I don’t think so and that’s because Katz and Goldin are on the wrong side of the “human capital” versus “signaling” debate on the impact of higher education. From the article, it seems clear that they are “human capital” believers – that is, they think the reason why people with added formal education earn more is because their coursework has added a lot to their useful skills and knowledge. They say that employers demand skilled workers for better-paying jobs and it is education that gives students the needed skills. So if we want to reduce that wage gap, we need to ensure that more young people finish high school and go on to college.
The signaling theorists don’t agree. Formal education doesn’t so much train people or give them skills as it enables employers to identify those people whom they want to train. A. Michael Spence is the best-known proponent of this position, for which he received the Nobel Prize in Economics in 2001. (His book Market Signaling, published in 1974 is out of print and I can find no link to his 1973 Quarterly Journal of Economics paper “Job Market Signaling.”)
As an illustration, consider the legal profession. Individuals who think they’d like to become lawyers go to law school. Those who make it through and earn their degrees thereby signal prospective employers that they are fit to enter the profession. The law school coursework itself does little to equip the student to actually do legal work; nearly all of what the successful lawyer knows he learns on the job. What law school does is to position the student in the mass of graduates. Those who graduate from an elite school such as Harvard will be extended offers that they would not extend to graduates of non-prestigious schools. Law firms don’t know which graduates will be the most productive for them once trained, but where a student stands on the continuum from top-of-the-class at an elite school to bottom-of-the-class at a poorly regarded one signals to employers the likelihood of success.
Much of what goes on in education is like that. The advertising genius didn’t learn his craft in his college advertising class. He learned it by working in advertising – but he was given the chance to do so on the basis of his education signaling his probable success.
Katz and Goldin think that more formal education would mean more skills and therefore better jobs for many workers. The trouble is that formal education doesn’t really do much to impart skills, but even if it does, we still face the fact that workers are positioning themselves for the range of jobs that the economy creates. No matter how much education we give people, there are still going to be a lot of jobs like mowing lawns and serving sandwiches that don’t pay well. The man who takes off your old set of tires and puts on the new set isn’t going to make any more money just because he has a college degree.
Professor Katz is aware that some people argue that we already send too many kids to college, but says “That’s absolutely wrong….The market is very bad for people with only a high-school diploma – they’re not doing much better than people who dropped out in the eighth grade.” That’s true, but it doesn’t follow those high school grads will necessarily be better off after spending years of time and lots of money in the effort to signal something about themselves. As I pointed out here, the labor market already is glutted with workers with college degrees and many of them are ending up in jobs that don’t call for any college skills – and also don’t pay well.
In sum, the “wage gap” isn’t a problem, but even if it were, pushing more people into college wouldn’t help to solve it.