[Paleopsych] NYT: College Degree Still Pays, but It's Leveling Off

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College Degree Still Pays, but It's Leveling Off
NYT January 13, 2005

Ever so gradually, the big payoff in wages from a college
education is losing its steam, which calls into question
the emphasis that the White House, under both Bill Clinton
and George W. Bush, has placed on a bachelor's degree as a
sure-fire avenue to constantly rising incomes.

Men and women with four years of college earn nearly 45
percent more on average than those with only a high school
diploma, according to the Bureau of Labor Statistics. The
spread is as high as it has ever been, but it has been
stuck in the 45 percent range since the late 1990's, and
through the 1990's it rose much more slowly than in the

Although the payoff from a college education is leveling
off, income inequality continues to grow. That suggested to
some economists at the annual meeting last weekend of the
American Economic Association that employers are making
wage decisions on criteria that have little to do with the
supply of and demand for educated workers.

The leveling off of the wage premium for a four-year
college degree has lasted long enough to suggest that it is
not just a pause in an otherwise constantly rising payoff
for those with bachelor's degrees, but another significant
shift in labor market dynamics. The payoff for a college
education fell in the 1970's only to reverse course, rising
sharply in the 1980's and then leveling off in the 1990's,
even showing signs of beginning to fall in the current

"We always knew that the return in wages to a college
education fluctuates, but we forgot," said Cecilia E.
Rouse, a Princeton University labor economist, "and now we
are being forced to remember."

The 1980's experience gave birth to the skills-mismatch
thesis - the view that millions of workers lacked the
college training required for the increasingly high-tech
jobs that the new economy generated. Out of that thinking
came stepped-up federal spending on college scholarships,
tuition tax credits and the like. That put the burden on
individuals to get the necessary education, with the
government playing a supporting role as financier.

The portion of the population with bachelor's degrees today
is about 30 percent, not much above where it was in the
1980's. That limited supply of baccalaureates would suggest
strong demand for them and a continual increase in the
spread between what college graduates earn and what the
much more numerous high school graduates earn.

The dynamics, however, do not work that way. For one thing,
the wage spread between high school and college graduates
is determined by what happens to each side of the equation.
During the 1980's, high-school-educated blue-collar workers
lost well-paying jobs by the hundreds of thousands as
domestic manufacturers increasingly lost out to foreign
competitors. As their incomes fell, the spread widened

The wages of the high school educated did not begin to
increase again until the late 1990's, when tight labor
markets increased the demand for their services. Now, the
incomes of the high school educated are rising almost as
quickly as the incomes of the college educated, according
to an analysis of wage data by the Economic Policy
Institute. That brings into question how much value a
college education adds.

"The obsession with education has become a mantra to avoid
tough political choices," said Harley Shaiken, a labor
economist at the University of California, Berkeley. While
education is essential, Mr. Shaiken and other economists
argue, it is not enough. They would put more of the burden
on government to close the wage gap, through such
additional steps as raising the minimum wage and
strengthening the laws governing collective bargaining.

That argument may undervalue the advances that are being
made in high school education, says Richard Murnane, a
specialist in the economics of education at the Graduate
School of Education at Harvard. He notes that many states
now require high school seniors to pass "exit exams" to get
their diplomas.

Because these exams require considerable proficiency in
reading and mathematics, "employers are beginning to see
that high school graduates have more skills than they used
to have," Mr. Murnane said. If college graduates ask for
too much money, he said, employers may hire these high
school graduates instead.

Another dynamic also undermines the value of a college
degree, says David H. Autor, an economist at the
Massachusetts Institute of Technology. While the college
premium appears to be leveling off, the spread between the
incomes of the highest-earning Americans and those in the
middle expanded almost as fast in the 1990's as it did in
the 1980's.

"If I may speak somewhat loosely, there continues to be
rising demand for people who have very strong cognitive,
managerial and communications skills," Mr. Autor said. "The
vast middle, whether they are college educated or not, are
not in that upper category of cognitive elite. The elite is
college educated, but not all the college educated are
those people."

The leveling off of the college premium came up in various
panel presentations at the American Economic Association
meeting in Philadelphia and in interviews with economists.
One panel explored what Richard B. Freeman, a Harvard labor
economist, described as the seemingly inexhaustible supply
of immigrants with advanced college degrees who hold or
seek jobs in America, depressing the demand for and the
wages of all well-educated job seekers, immigrants and
native Americans alike.

Another study, presented by Robert G. Valletta, an
economist at the Federal Reserve Bank of San Francisco,
found that wage increases associated with computer use at
work were "relatively constant across educational
categories" from 1984 through 2003, favoring the college
educated only from 1997 to 2001, the era of the dot-com
boom. A third study, presented by Ms. Rouse and Lisa Barrow
of the Federal Reserve Bank of Chicago, found that the
payoff from schooling was roughly the same across ethnic
and racial groups - rising in tandem in the 1980's and
tending to level off in the 1990's.

Their study, they said, knocked down the view, held by some
economists, that the return to education was higher "in
individuals who come from more advantaged families." The
study also added to the documentation that the income
return for schooling rose in the 1980's, adding roughly 10
percent to a worker's wage in 1990 for each year of
education, up from 7 percent in 1980. Since 1990, however,
the added value has remained at 10 percent.

That puts Mr. Freeman of Harvard on the spot. He first made
his name as a labor economist with the publication in 1976
of a book entitled "The Overeducated American," which
argued that the college wage premium, which was then
falling, would continue to fall. His reasoning was that the
demand for college-educated workers was being suppressed by
the large number of educated baby boomers taking jobs,
while the growth in exports was sustaining the demand for
high-school-educated factory workers. All too soon, Mr.
Freeman turned out to be dead wrong.

"The only reason the payoff for a college degree went up in
the 1980's was that there was a wonderful relative shift in
the demand for educated workers," he said. "But there is no
rule of law that says demand for educated labor will always
rise faster than the supply. It could go the other way."


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