Economists Notebook: Why Higher Education Matters

On the eve of Oregon State's graduation ceremony (congrats grads!), and on the precipice of a fiscal cliff over which Oregon's public universities and university students are about to fall, it is worth remembering why it all matters.

This outstanding article from Goldin and Katz provides a nice and reasonably accessible synopsis. Here are the main points nicely summarized:

The American Dream has been placed on hold. Putting aside the recent financial meltdown and the current recession – if you can – the main reason is an educational slowdown. For most of American history, the average American child was far more educated and better off financially than his parents. But ever since the 1970s, US growth in educational attainment for successive generations has substantially slowed. The slowdown in education spells trouble for economic growth and economic inequality, as many authors have noted, e.g. Heckman (2008).

An educated populace is a key source of economic growth directly, through the improved productivity of workers, and indirectly, by spurring innovation and aiding the diffusion of advanced technologies. Broad access to education was a major factor in US economic ascendancy and in the creation of a broad middle class. The American Dream of upward mobility both within and across generations has been tied to educational access.

Ever since the beginning of the twentieth century, technological change has operated to increase the relative demand for educated and skilled workers. In academic parlance, technological change has been “skill-biased” – smart machines require smart workers. Technological change increases the relative demand for skilled and educated workers, but educational advance increases their relative supply. This “race” between education and technology can produce rising, declining, or stable levels of economic inequality.

US economic inequality has been on a roller coaster ride during the past century. Wage inequality and educational wage differentials decreased from around 1910 to 1950. They remained fairly stable until about 1980, after which economic inequality soared. The contrasting descent and rise of economic inequality in the twentieth century is linked to the history of educational attainment.

Here is the picture worth, in this case, probably about ten thousand words:

Source: U.S. Census Bureau, Historical Income Tables, table F3, updated September 15, 2006.

Note: The figure plots the annual percentage growth rate in mean real family income by quintile and for the top 5 percent of families for 1947 to 1973 and 1973 to 2005. Incomes are converted to constant dollars using the Consumer Price Index Research Series (CPI-U-RS). The income concept used is the official U.S. Census Bureau measure of pre-tax, post-transfer money income.

What this graph shows is how, since the mid seventies, economic growth has been concentrated in the wealthier quintiles. What Goldin and Katz state quite convincingly is that this is an education story, full stop.

As Goldin and Katz note: "For most of American history, the average American child was far more educated and better off financially than his parents. But ever since the 1970s, US growth in educational attainment for successive generations has substantially slowed." In Oregon this trend has already reversed and is only getting worse. To me what this means is that Oregon's future economic prosperity is increasingly going to be tied to well educated immigrants from other states and that native Oregonians are going to find themselves increasingly poorer relative to those immigrants.