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Monday, May 08, 2006

Growing Income Inequality and the Education Gap

Edward Lazear and Katherine Baicker of the President's Council of Economic Advisers say the growing disparity in wage income between skilled and unskilled labor is not the result of globalization, immigration, or administration policy. The reason for growing income inequality, they say, is increasing returns to education for skilled labor, and this is an opportunity not a problem. "Having an economy that places a greater value on skills and education is a good thing."

They promote a solution to the problem of growing income inequality that attempts to take advantage of this opportunity by reducing the education and skill gap. Three particular steps are recommended as solutions, the No Child Left Behind education reform, the American Competitiveness Initiative, and more importantly they say as responsibility is shifted away from government, is the hope that families will do a better job to "provide the environment and encouragement that is so helpful in producing an educated population":

America at Work, by Edward P. Lazear And Katherine Baicker, Commentary, Wall Street Journal: There is no question that the U.S. is experiencing strong economic gains... The economy created about two million jobs last year, and Friday's jobs report for April showed that we are on track to add more than two million new jobs this year.

This job growth is undeniable, but some ... claim that the benefits of this economic boom are being enjoyed only by the relatively well-off, and that we have left the rest of our workforce behind. Is this true? Over the last 25 years, the wages of the skilled have continued to grow faster than the wages of the less skilled. For example, the wages of the college-educated have grown by 22% since 1980, while the wages of high-school drop-outs has fallen by 3%.

This does not mean, however, that the rich are benefiting at the expense of the poor. Instead, it means that the return to investing in education and training continues to grow. ... Having an economy that places a greater value on skills and education is a good thing. Our economy can grow more quickly when the returns to investment are high, and human capital investment is the most important form of investment.

This presents us with opportunities and challenges. We have the opportunity to increase our standard of living as our workers reap the benefits of the skills that they have acquired. We face the challenge of ensuring that all Americans have access to the education and training that the modern economy values so highly.

The data show that it is this greater return to investing in education that is driving the long-run widening of the income distribution. The cause is not increases in immigration or international trade, as some have alleged. First, wages for less-skilled workers have not declined with growing trade, even in sectors of the economy with the greatest import competition. Second, some of the groups that have experienced the highest wage growth have also seen increased immigration swelling their ranks. Silicon Valley is full of highly paid immigrants and native-born Americans ... earning very high salaries in the high-tech sectors ... Third, those who have examined the data systematically find that trade and immigration can account for at most a small proportion of the increased wage spread that has occurred over the past 25 years.

To make sure that the gains from technology are enjoyed by all, we must be vigilant in providing training and educational opportunity for all. Programs such as the No Child Left Behind ... and American Competitiveness Initiative are vital steps in that direction. Perhaps even more important are steps that families can take to provide the environment and encouragement that is so helpful in producing an educated population. The president's tax cuts have made the tax code more progressive, which also narrows the difference in take-home earnings.

Through education, hard work and entrepreneurship, there is great opportunity for Americans to improve their economic circumstances over their lifetimes. ... Those who invest in education increase dramatically the likelihood that they will enjoy these improvements in their standard of living. ...

Given the importance being given to education in explaining wage disparity, I would like to see a higher level of commitment from the administration to improving education at all levels than has been exhibited to date.

With regard to the claim that taxes are more progressive, see this recent report from the Center for Budget and Policy Priorities for a counterargument:

Recent Tax And Income Trends Among High-Income Taxpayers: Administration officials have consistently sought to portray the distribution of benefits from the 2001 and 2003 tax cuts as balanced or even progressive. Recently, for example, the Treasury Department released a ... fact sheet... The fact sheet makes two main points: that “the individual income tax is highly progressive ... higher income taxpayers pay most of the individual income tax...,” and that the burden these taxpayers bear has increased as a result of the tax cuts enacted under the Bush Administration.[1] These Administration claims are designed to counter arguments that the tax cuts enacted since 2001 are tilted to those at the top of the income scale. The claims, however, are misleading...

Update: Brad DeLong comments on the progressivity claim and on Greg Mankiw's response to the editorial in "Cue the Noisemakers."

Update: I should have linked this commentary by Paul Krugman on whether the returns to education explain the growing income gap, "Graduates and Oligarchs." Quoting, "But Mr. Bernanke did stumble at one point. Responding to a question ... about income inequality, he declared that "the most important factor" in rising inequality "is the rising skill premium, the increased return to education.""

    Posted by on Monday, May 8, 2006 at 12:48 AM in Economics, Income Distribution, Politics, Universities | Permalink  TrackBack (0)  Comments (38)


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