Economy and Education & Workforce Development

ECONOMIC ANALYSIS: Education does matter in today's labor market

July 24, 2006

Here's an update from the American labor market: Paying attention in school really does matter. Getting good grades and going to college is a big deal. What you study and what you learn will affect the rest of your life.

Parents have been telling their kids that for a long time, and some of us even listened. But the message above isn't from a speech or a lecture. It comes from evidence provided by the U.S. economy, in particular the wage histories of millions of workers. The message is familiar, but that doesn't make it any less urgent.

In fact, it needs to be amplified-the rewards to education and training, if anything, have been steadily growing, as have the penalties to those who choose to forgo them.

The fact that the wage gap between college-educated and high-school-educated workers has continued to grow has been a mild surprise to economists. In relative terms, the supply of college-educated workers has grown much more rapidly, pushing into once-lower-skilled occupations like sales and administrative support. If education were merely a commodity, we would expect those higher numbers of college graduates to depress the wage premium.

But this has not been the case. Over the last two decades, the wage increases paid to workers with a high school education have not kept up with inflation-posting a decline of about 0.8 percent per year, on average. For those with at least some college, the erosion has been less pronounced.

On the other hand, workers with a fouryear degree have seen their inflationadjusted wages grow an average of about 0.5 percent per year, while those with graduate degrees have enjoyed a 1.4-percent per-year growth in the purchasing power of their paychecks.

That adds up to a double whammy for less-educated workers. Not only are they paid less, but the growth in their wages is less than their well-schooled counterparts. These facts help explain why universities have been successful so far in raising tuition at rates significantly higher than general prices. Indeed, the data suggest that even at today's much higher prices, higher education can be an attractive investment.

Untangling exactly why the college premium has grown even as the ranks of the college-educated grow has been a challenge. But most research supports the notion that technological change in the U.S. economy has increased employers' appetite for more educated workers faster than the nation's colleges and universities have been able to produce them. And while the specialized skills that ultimately make these workers valuable are largely acquired on the job, their education provides them with the background and the tools needed to learn.

For each of us individually, this can be a harsh message. The labor market is fast becoming the ultimate report card for how we spend our youth. Increasingly, for those of us who fail to appreciate the importance of education during the years set aside for us to attain it, the price we pay in lifetime earnings is large.

But is this a problem for Indiana as a state? Indiana's commitment to higher education, as judged by spending in support of state universities, is strong, yet we rank near the bottom among states in the proportion of our adult population with college degrees. And we've received troubling news about high school graduation rates recently as well.

Once-plentiful opportunities for decent-paying production-oriented jobs requiring few educational credentials across the state no doubt account for some of this. But if the message young people are getting from parents and grandparents raised in this earlier era is that college is not for everyone-or that it is a luxury they don't need-they should know this is not the message coming from the labor market.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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