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Educational credentialing and household income: 1973-2013

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It’s well known that having more educational credentials correlates strongly with higher income. This correlation has led lots of people to make the common sense assumption that increasing the educational credentials of the population as a whole will in turn produce higher incomes. Common sense assumes, as it so often does in a naive pre-theoretical way, that correlation equals causation.

At a more sophisticated theoretical level, the assumption at work here is that enhanced credentials signal enhanced human capital. In other words, more education (or in any case more educational credentials — a distinction which is usually ignored) creates or enhances abilities in its recipients they would not otherwise have, and these abilities allow them to perform work they would not otherwise be able to do.

If we then further assume that this work would not be performed, or at least not be performed as profitably, in the absence of the enhanced abilities signaled by the credentials, then enhanced human capital increases income by ameliorating structural un-and-underemployment.

That’s why almost all of Tom Friedman’s conversations with garrulous cab drivers invariably end with him concluding that everybody needs to get an advanced degree in bio-mechanical statistics, because in a globalized flat world we can no longer afford for the average person to be average.

There is, however, a very different account of why more educational credentials correlate with higher income. In this alternate world, that correlation exists not, or at least not primarily, because the credentials signal that human capital has been enhanced, but rather because those credentials signal that the possessors of the credentials have certain valuable preexisting abilities, and/or enjoy higher class status, than those without them. To the extent this alternative account is correct, educational credentials are positional goods, which have a realizable pecuniary value precisely to the extent that they are scarce (I’m not going to address the non-pecuniary value of education here, other than to note again that the value, pecuniary or otherwise, of actual education is quite a different thing from the value of educational credentials.)

One way of testing these dueling theories is to look at what happens to incomes across time, when the percentage of a population that holds various credentials changes significantly. Of course any such comparison is going to be incomplete in all sorts of important ways. Still, it would seem that, all other things being equal, increasing educational credentials in a population should correlate strongly with increasing incomes in that population, if the human capital theory is valid.

Consider then the following (all dollar figures are expressed in constant 2013 dollars):

US GDP in 1973: $5,889,810,000,000

US GDP in 2013: $16,768,100,000,000

GDP per capita 1973: $27,790

GDP per capita 2013: $52,986

As I’ve noted before, it has been one of the curious features of cultural and political rhetoric in America for more than a generation now that even many highly educated (or in any event credentialed) people assume that the economy as a whole is stagnant, not growing, weak in comparison to the post-World War II boom times, etc. In fact, in terms of just annual economic output, (a figure which doesn’t include accumulated wealth) the country is 11 trillion dollars richer than it was 40 years ago: real GDP has nearly tripled, and even after taking into account population growth, it has almost doubled.

During this same time, the educational credentials of the population have improved almost as dramatically as the nation’s measurable economic output. Per the enhanced human capital theory, we’re getting richer because we’re getting smarter, and all that’s necessary to extend this virtuous — or at least profitable — circle more or less indefinitely is for various forms of education to become increasingly universal, until we finally inhabit a Friedmanesque Lake Wobegon, in which all the cab drivers can quote Wittgenstein, while writing ever-more elaborate computer programs in their off hours.

A look at the latest census data on household income appears to tell a very different story. Consider the following cohorts:

(a) Households headed in 1973 by people 45-54 years of age.

(b) Households headed in 1973 by people 25-34 years of age.

(c) Households headed in 2013 by people 45-54 years of age.

(d) Households headed in 2013 by people 25-34 years of age.

What sorts of educational credentials did these different cohorts possess? Here, we’ll look at the two most crucial credentials for the purpose of a population-wide analysis: high school and college degrees.

Approximate percentage of 45-54 year old adults who possessed a high school diploma or more in 1973: 50

Approximate percentage of 45-54 year old adults who possessed a bachelor’s degree or more in 1973: 8

Approximate percentage of 25-34 year old adults who possessed a high school diploma or more in 1973: 70

Approximate percentage of 25-34 year old adults who possessed a bachelor’s degree or more in 1973: 19

Approximate percentage of 45-54 year old adults who possessed a high school diploma or more in 2013: 81

Approximate percentage of 45-54 year old adults who possessed a bachelor’s degree or more in 2013: 23

Approximate percentage of 25-34 year old adults who possessed a high school diploma or more in 2013: 83

Approximate percentage of 25-34 year old adults who possessed a bachelor’s degree or more in 2013: 30

Note that most discussions of improving educational attainment focus on increasing the percentage of college graduates. Yet if more education increases income by enhancing human capital, then increasing the percentage of high school graduates should have an even stronger effect. This is because any improvement in abilities due to more education ought to be subject to diminishing marginal returns. For example, someone who goes from running 10 miles per week to running 20 will see far more improvement in aerobic capacity per extra mile run than someone who moves from running 20 to running 30. If we assume the validity of the enhanced human capital theory of education, it would be very peculiar if someone who received 13 years of formal education rather than nine did not get a greater benefit in terms of the resultant enhancement of human capital from each extra year of education, in comparison to someone who received 17 rather than 13.

With these things in mind, let’s now look at the median household income (see Table H-10) for people in these demographic cohorts.

Median household income, 45-54 year olds, 1973: $65,988

Median household income, 25-34 year olds, 1973: $55,458

Median household income, 45-54 year olds, 2013: $67,141

Median household income, 25-34 year olds, 2013: $52,702

Despite the 60% increase in the prevalence of high school diplomas, and the near tripling in the prevalence of college degrees, that took place among middle-aged people between 1973 and 2013, median household income for this demographic group is practically identical to what it was 40 years ago. Meanwhile, despite their impressive gains in educational credentialing relative to their demographic peers of four decades ago, the comparable figures for 25-34 year olds show an actual decline in median household income between 1973 and 2013.

Consider how extraordinary these figures are, given both the almost incomprehensible increase in the nation’s total wealth over the past four decades — $11 trillion dollars more per year in economic output! — and the fact that, in the US population as a whole, college degrees are today as common as high school degrees were in the 1940s.

Note too that, when considering median household income across time, the labor force participation rate is higher today than it was in the early 1970s (approximately 45% of women worked outside the home in 1973, as compared to nearly 60% today), which suggests that the same — or, in the case of 25-34 year olds, lower — median household income today relative to forty years ago is actually requiring more hours of paid labor to produce.

It would be something of an understatement to say these statistics call into question the enhanced human capital theory of educational attainment. Instead, they are precisely what we would expect to find if educational credentialing is a positional good: one whose value must invariably deteriorate as it becomes less scarce. (Currently, somewhere between a quarter and a fifth of 25-34 year old college graduates are earning less than the median high school graduate of the same age).

Meanwhile, consider what has happened to the cost of undergraduate education over this time frame (2013$):

Average Private Four-Year Non-profit College Tuition 1973: $10,783

Average Private Four-Year Non-profit College Tuition 2013: $30,094

Average Public Four-Year College Tuition 1973: $2,710

Average Public Four-Year College Tuition 2013: $8,893

(Interestingly room and board charges have also risen quite a bit, although not as drastically, from $6,200 in 1973 to $11,800 in 2013 at private colleges, and slightly less at public schools).

All this in turn suggests that more than a generation’s worth of rhetoric regarding how we must inculcate the rest of society with upper-middle class mores in regard to the value of obtaining educational credentials has ultimately harmed efforts to combat increasing social and economic stratification.

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