Wage Gap Based on Education Levels Off
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Difference for College,
High-School Grads Hits Plateau
By Michael M. Phillips
07/22/1996
The Wall Street Journal
Page A2
(Copyright (c) 1996, Dow Jones & Company, Inc.)
The gap between the wages paid to recent college and high-school graduates, which skyrocketed during the 1980s, has finally reached a plateau. And a prominent labor economist believes that is the first sign that overall inequality in U.S. wages may also have stopped its rapid expansion.
The economist, Kevin M. Murphy of the University of Chicago, says recent Census Bureau data suggest that the payoff to a college education -- the so-called college premium -- has leveled off. A recent college graduate in 1978 could expect to earn 38% more than the holder of a high-school diploma. When converted into 1994 dollars, to control for inflation, that means a recent college graduate in 1978 earned about $13.03 per hour compared with $9.43 for high-school graduates. The premium rose sharply by 1990 to 79% ($13.93 compared with $7.79). But in 1994, the college premium measured only 73% ($12.93 compared with $7.48), which economists consider evidence that its rise has come to an end.
"Based on my reading of the evidence . . . it would seem that growth in the wage gap has probably run its course," says Mr. Murphy, who has written extensively on the subject and is cited by other economists for his expertise.
Economists have long believed that growing wage inequality in the U.S. resulted from a shift away from factory jobs, rising international competition, growing immigration and, perhaps most important, the increasing use of computers and other sophisticated technologies in the workplace. These factors tended to depress wages of lower-skilled workers while enhancing wages of workers with stronger skills.
But now, says Mr. Murphy, job-seekers are responding in textbook economic fashion to these changes. Because workers with greater skills and education earn considerably higher wages, more people are attending college or getting other training. And as college graduates flood the job market, they are beginning to depress the premium their degree is worth above what a high-school diploma would have earned them.
Meanwhile, Mr. Murphy says, wages of high-school graduates could start to rise as their reduced numbers result in higher salaries.
It is too early to conclude that overall wage inequality is actually reversing or that income inequality -- a broader measure of the wealth divide that has continued to widen in recent years -- has peaked. But wages are a major component of income and a good barometer of things to come, Mr. Murphy says.
Prompted by the growing financial benefits to education, the share of 18- to 24-year-olds enrolled in college jumped from 26% in 1980 to 35% in 1994, according to the 1996 Economic Report of the President. Inevitably, Mr. Murphy and other economists argue, that rush to the classroom stifles growth in the college wage premium -- a trend that appears first among recent graduates who have to slug it out for jobs that simply don't pay as much as they had hoped.
Certainly that has been the street-level view from companies such as Interim Services Inc., a Fort Lauderdale, Fla., temporary-staffing and home health-care company that in 1995 placed 375,000 people.
Ray Marcy, Interim's president and chief executive officer, has noticed over the past five years a surge in the number of new college graduates seeking work, and a commensurate surge in the number of those graduates willing to work as secretaries or in other lower-paying positions.
Jacob Mincer, a Columbia University labor economist, projects that -- thanks to the surge in enrollments -- the college wage premium will actually tumble 25% over the next six to seven years, barring some unexpected new economywide jump in demand for skilled workers. Even students who don't finish their college degrees or who attend two-year programs help damp growth in the wage gap because they increase the pool of skills in the labor force, Mr. Mincer says.
While other economists agree that, in principle, a wage gap generates a self-correcting increase in the supply of skilled workers, some are more skeptical than Mr. Murphy about the speed and scale of that adjustment.
Harvard University economist Lawrence F. Katz and John H. Bishop, chairman of the human-resource studies department at Cornell University, wonder whether the post-baby-boom students -- even though a larger proportion of them attend college -- are numerous enough to reverse the growth in overall wage inequality.
"There has been a slowdown in the rate of increase in the college premium -- in fact, I think it has just about stopped dead for the people with one to five years of work experience," says Mr. Bishop. However, he adds, "the wage premium for people of all experience levels has continued to rise."
Yet history confirms the importance of workers' response to shifts in relative wages. The advent of electrification in American factories between 1900 and 1930, for example, produced a large demand for workers with high-school educations. But the wage gap between those with and those without high-school diplomas didn't widen sharply during that period, because the supply of high-school graduates grew fast enough to meet the demand, according to recent research by Mr. Katz and Claudia Goldin, another Harvard economist.
A similar situation arose in the early 1970s, when a surge in college enrollment -- prompted in large part by the coming of age of the baby boomers and the military-draft deferrals available to college students during the Vietnam War -- drove down the college wage premium. There were simply too many grads chasing too few jobs.
The reduced financial benefits of having a college education and the graduation of the last of the baby boomers began to drive enrollment rates down again at the end of the 1970s. Gradually, as educated workers grew more scarce, the college wage premium shot up again -- and with it arose the historically large gap between the wages of the more educated and the less educated.
The wage gap, though perhaps abhorrent politically and socially, has the beneficial effect of increasing the value of investment in human resources, says Mr. Murphy.
"You hear coming out of the White House continually this notion that you need to invest in the workers," he says. "There's nothing out there that's going to do more to generate that investment than the existence of this wage gap. People respond to those kinds of incentives much more than they respond to anybody's rhetoric."