Claudia Goldin and Lawrence Katz Explain Economic Inequality and Its Relationship to Education Attainment

In the abstract for their working paper, which became the eighth chapter of their book The Race between Education and Technology, Claudia Goldin and Lawrence Katz present their overall argument about the relationship between education attainment and differences in income:

U.S. educational and occupational wage differentials were exceptionally high at the dawn of the twentieth century and then decreased in several stages over the next eight decades. But starting in the early 1980s the labor market premium to skill rose sharply and by 2005 the college wage premium was back at its 1915 level. The twentieth century contains two inequality tales: one declining and one rising. We use a supply-demand-institutions framework to understand the factors that produced these changes from 1890 to 2005. We find that strong secular growth in the relative demand for more educated workers combined with fluctuations in the growth of relative skill supplies go far to explain the long-run evolution of U.S. educational wage differentials. An increase in the rate of growth of the relative supply of skills associated with the high school movement starting around 1910 played a key role in narrowing educational wage differentials from 1915 to 1980. The slowdown in the growth of the relative supply of college workers starting around 1980 was a major reason for the surge in the college wage premium from 1980 to 2005. Institutional factors were important at various junctures, especially during the 1940s and the late 1970s.

A recent article by Adam Davidson, appearing in the September 8, 2015 issue of The New York Times, “Is College Tuition Really Too High?puts Goldin and Katz’ argument into the 2015 economic context.

Although a college degree can lead to economic benefit over individuals’ lifetimes, Davidson notes, the aid system disproportionately favors less needy students, which ends up placing more of a debt burden on those in more financially strapped circumstances.

College aid — all the federal and state grants and subsidies, the various scholarships and aid packages offered by schools and foundations — evolved in piecemeal fashion over decades. Considered as a whole, it is a bizarre system. Students who go to private nonprofit schools, disproportionately children of middle-class and wealthy parents with college educations, receive an average of $25,000 a year in aid. Those who go to less-selective public schools receive an average of $13,500 a year. And students who attend public community colleges, who are most likely to come from disadvantaged backgrounds and parents without college degrees, receive an average of $8,000 a year. In other words, our system gives three times as much aid to the least needy as it gives to the most.

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