February 14, 2003
Rewards to Skill Just Keep Growing
There's been a quiet trend underfoot in the U.S. economy that's had an enormous impact on our policies and our institutions. It has stayed out of the headlines, yet it has affected virtually every one of us.
That trend is the continued, growing reward bestowed by the economy to those in the labor force with specialized skills. The payback in increased earnings to those who have more formal education and specialized knowledge continues to soar, even as the number of skilled individuals has increased many-fold. The bottom line is that the economy is growing in such as way as to increase the demand for more highly skilled individuals faster than we can produce them.
According to the National Bureau of Economic Research, between 1979 and 1995, the wage premium enjoyed by college graduates relative to high school graduates in the work force grew by 25 percent. During most of those years, the inflation-adjusted earnings of high school educated workers had essentially zero growth, while college degreed individuals experienced steady gains. That differential, more than anything, explains why the gap in lifetime earnings between these two groups now approaches an astounding 2 million dollars.
That's an opportunity for young individuals, of course. And it's great copy for colleges and universities who continue, in spite of recent tuition increases, to be good investments for the future. But it’s also a challenge for our society as a whole. A world where the haves get out too far ahead of the have-nots can be a very fragile place.
Whichever way you look at it, the distribution of income in this country -- as in other developed nations -- has widened significantly. The NBER reports that the ratio of earnings of the highest paid ten percent of the workforce to the lowest paid ten percent rose from 266 percent in 1979 to 366 percent in 1995.
This has been portrayed by some as a sign of failure of our entire economic system. That's a bit one-sided. All groups, rich and poor alike, have enjoyed over the years the tremendous benefits of labor-saving and life-extending advances. But increasing inequality is certainly a rough edge to market capitalism that we cannot be proud of.
The clustering of our individual economic fortunes around these widening extremes has yielded a similarly wide gap in opinions about what, if anything, we should be doing about it. While the notion of taxing the rich more heavily has always been popular, our zeal for doing so goes down rapidly when the tax code starts treating us as rich. And the same system that produces the disparity between rich and poor also provides the means for less fortunate individuals to improve their economic status.
We economists are content just trying to understand the forces at work. Certainly the declining influence of unions, and even the reduced significance of the minimum wage has played some part in changing earnings disparities. But the most important factor at work appears to be technological change.
Rather than displacing workers of all skill levels, new technologies implemented in the last thirty years have favored the more highly skilled side of the labor force. In some organizations, new technologies have totally redefined jobs in a way that makes them unattainable for all except those with very specialized skills. Companies spend considerable time and resources in finding workers whose skills match those jobs, because doing so yields tremendous dividends.
That's quite different from the career ladder that our parents once sought to climb. And from the data we have on earnings, it is producing quite a different result.
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