Do we have a passion for economics? Judging from the numbers of economics majors at colleges and universities across the country, the answer is probably no. The world of graphs and statistics we inhabit is not everyone’s cup of tea.
But if few of us like to study the economy, we all have to live and work within its borders. And the most important interaction most of us will ever have with the economy occurs when we venture into the world and join the labor force. As every parent knows, the decisions young people make about their training, education and careers have profound implications for the rest of their lives.
What is the formula for success? As every young person knows, there’s no shortage of answers from adults. But what does the evidence say?
Economists have studied for centuries how the labor market rewards us for what we do in the economy. We still don’t have it all figured out. But some of the research results of the last decade or so seem especially relevant for individuals, or even entire communities, who want to get on a faster earnings track.
The overall message that comes out of the labor market is simple enough: The market rewards skill. Some skills are rewarded more than others, of course, but without specialized skills and training, the prospects for higher earnings are practically nil.
But how does one acquire skill? In one sense, this question is also easy to answer, although the answer may surprise you. The overwhelming portion of job skills is acquired on the job in private companies. But the gate that controls which people are chosen to work in jobs and occupations where skill acquisition-and earnings growth-is fastest is not open to all.
Indeed, some research now suggests that some of the most important determinants of our future earnings are formed at a very young age. Something happens to us in childhood that affects our ability to absorb job skills later in life that will figure so prominently in our future earnings.
It is not simply the intelligence quotient or what is known as cognitive ability. For example, if you compare those who graduate from high school and do not go on to college with those who drop out and later obtain GEDs, you find that high school graduates earn more, even after correcting for the small difference in their IQ. There is something about the motivation, social skills or other non-cognitive skills of the GED population that results in their lower performance.
The effects of these kinds of disparities can be greatly magnified in earnings profiles over time. That’s because it’s more productive for individuals and companies to invest in education and skills for those who are better equipped to absorb them. The result is a filtering process that exacerbates the disparity between haves and have-nots over one’s lifetime.
This research also sheds light on the apparent ineffectiveness of many publicly funded job training programs. What is really needed, and what is impossible to deliver in the short time span of a typical program, is to undo the impact of years of social and developmental disadvantage that is at the root of the jobskills deficit.
That’s a pretty tall order. Even if it could be done, I suspect a world where government agencies intervene on a massive scale to correct the deficiencies in our upbringing is not a pleasant or appealing prospect for some of us. But if this research is any guide, investment in early development may, nonetheless, yield significant returns.
Barkey is an economist and director of economic and policy studies at the Miller 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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