Inequality and Economic Policy by Church Tom;Miller Chris;Taylor John B.;

Author:Church, Tom;Miller, Chris;Taylor, John B.; [Church, Tom]
Language: eng
Format: epub
Publisher: Hoover Institution Press
Published: 2015-08-15T00:00:00+00:00

FIGURE 6.1. Returns to college education, 1963–2012

Source: Based on previous work done by Katz and Murphy (1992) updated to 2012

The key feature on which you might focus is that there was a decline in the returns to college in the 1970s, which was actually a period where people were talking about Americans being overeducated. That was followed by the dramatic rise that occurred during the 1980s, a continued rise in the 1990s, and a relatively flat premium in the 2000s. What I hadn’t really fully appreciated until the discussion over the last few days is that the timing of 1980 to 2000 as the big transition period is true for things beyond the college premium and wage inequality. A lot of the graphs that we saw the other day and a lot of the discussions that we heard yesterday on inequality at the top of the income distribution mirrored that same picture. A lot of what happened at the top of the income distribution happened pre-2000. That’s certainly the case here when we look at the returns to college.

The other thing to note is just how dramatic that change is. The early-human-capital literature of the 1960s talked about the 7 percent return. It actually fell to maybe 5 percent in the 1970s. That was the “overeducated America” period. Now, you get returns more like 13 percent. It’s really quite dramatic. Again, think about it in terms of prices. If you think about college as an investment, this would suggest that there’s an enormous return to investment today—roughly triple what is was in 1980. At the same time, think about this as a price from the point of view of driving inequality in terms of the outcomes. It’s like when the price of oil goes up. All of the guys who have oil are much better off than they were before, and all of the people who need to buy gas are worse off than they were before. That’s part of the story. The other side is that there’s a big incentive now to go out and to find more oil and to produce more oil than you did in the past. That’s going to be true in the college market as well.

Figure 6.2 gives the change in the log wage rate over a roughly forty-year period from 1970–72 to 2010–12 for men and women by percentile of the wage distribution. These are different people at the beginning and end, and I’m matching the median in 1970 with the median in 2010. What we are asking is: how did the wages associated with different points in that distribution change over time? There are several interesting things about a figure like this, which will be part of the story when thinking about inequality.

One is to remember the timing. It’s going up. It’s not all the last ten years. It’s been going up over time, but the other is that this is an upward-sloping line throughout the range. There’s a bigger increase at

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