ECONOMIC ANALYSIS: Markets pay a premium for the college-educated

February 26, 2007

Nothing erases the thrill of getting a raise from your employer faster than the news that someone else got a bigger one. We care about how much money our friends, neighbors and coworkers make-not always in a benevolent sense-even though there is usually little we can do about it. The trappings of material wealth are all around us, and it is almost impossible, it seems, not to get caught up in the game.

But despair over disparities in income and wealth are really more than simply envy. The numbers written on our paychecks inevitably seep into our consciousness as measures of our individual talent and value. And our faith in the market system can be easily shaken when that system produces outcomes at odds with what we can intrinsically rationalize or comprehend.

The imbalances are in the headlines every day. Former Home Depot CEO Robert Nardelli received $210 million in severance pay after sending his stock price down 30 percent. The average pay for CEOs of S&P 500 companies was 369 times larger than the pay of an average worker last year. Is a system that bestows these kinds of rewards to those at the top, including the star athletes and entertainers who haul in truckloads of cash, really working?

It's a fun question to argue, perhaps, but the blowup over the outrageous paychecks of a few executives and celebrities masks something more important that has been occurring in the American economy over the last three decades. Since the early 1990s, growth in wages has been more concentrated in the higher end of the earnings spectrum. Or to put it another way, the rich have been getting richer.

The poor have been getting richer, too. Since 1973, inflation-corrected wages for those in the bottom half of the earnings distribution have risen 5 percent to 10 percent. When non-wage compensation-primarily health care and retirement benefits-are included, the growth is stronger. But since that growth rate is much less than the 25-percent to 30-percent rise in wages of those with pay in the upper 20 percent of the income distribution, the gap between high and low pay in the economy has increased significantly.

That much of the story is fairly wellunderstood. Indeed, one of the Democratic presidential candidates has made the specter of "two Americas," rich and poor, part of his stump speech. But much about how labor markets have produced this result has been missed.

For example, the disparity between the wages of high- and low-paid workers did not spring into being with the onset of more intensified globalization and technological change in the 1990s. In fact, wages at the lower end of the earnings spectrum saw their fastest growth in the last half of the 1990s, and the spread in wages today is less than it was 15 years ago, thanks to the remarkable gains in productivity across the entire economy over that period.

In fact, the inequality has been growing slowly and steadily over a span of decades. And if there is any simple theme that can be said to emerge from this highly complex story, it is the value of education.

Despite the increased numbers of college graduates in the work force, the premium the labor market bestows on those with fouryear and advanced degrees continues to grow every year. In relative terms, the average high-school-educated worker makes about the same inflation-adjusted wage today that he or she made in 1973, whereas the wages of the average worker with an advanced degree have grown 25 percent.

Let's hope that those who would solve this problem-if it even is one-learn enough about its cause to keep the cure from being worse than the disease.

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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