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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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  • Lee Rudolph

    (or in any case more educational credentials — a distinction which is usually ignored)

    Hey, I never ignored it! (And neither did a few other folks, like Paul Goodman and Ivan Illich.) Well into this millennium, the most common hit I’d get when ego-surfing on Google (aside from two blackjack books by some pseudonymous doppelganger of mine) was a one-liner I snarked forth on USENET sometime in the (early-to-mid) 1990s (about which one person had actually written to me, asking for permission to reprint it ON PAPER; the web hits all seemed to be stolen without attribution from that book, and most if not all of them seemed to spectacularly miss my point): “Nobody wants a good education; everybody wants a good degree.”

  • Steve

    That Weber guy was on to something…

  • Nobdy

    Isn’t it also possible that higher educational attainment is driving a rise in productivity, but the business owners rather than the workers are capturing all these gains?

    • GFW

      I came to ask a similar question … if GDP per capita nearly doubled in those 40 years, but *median* household income (headed by ages 25-54) went virtually unchanged, then one (or more) of these things must be true
      a) There are more households per capita.
      b) The Gini coefficient of this cohort’s income has increased by a lot (enough for the average to nearly double while the median remained the same).
      c) Some other cohort (over 55?) grabbed an outsize income gain relative to the 25-54 cohort.
      d) The ratio of “everybody’s income” to GDP has decreased (GDP includes activity that isn’t individual income).

      (a) is probably true, but not anywhere near enough to explain this. (c) seems unlikely. (d) – can someone here comment on this? (b) on the other hand is a straightforward explanation well supported by other observations of growing inequality.

      So, it would appear that owners of capital are reaping the gains while sellers of labor are getting, on average, very little to none of them.

      • GFW

        I see downthread JLV points out that (a) is a non-trivial contribution, possibly accounting for about 25% of the answer. Interesting.

        • MoMetaBlues

          Curious what the missing middle (35-44) looks like.

          As JLV points out below w/r/t business cycles, I think you have to take into account the grad-school opt-out phenomenon of people graduating into a recession, not being able to find a job and extending their education into that 25-34 range. Going to school and simultaneously earning large dollars usually only happens if you play football at USC.

          Also curious with increased tuition cost if/how the average graduation age has changed, if part-timers/pay-as-you-go students who graduate well past age 22 are dragging down that 25-34 income.

          No, the immediate 25-34 dividends aren’t what they should be, but wondering if that improves as people are more firmly established in the workforce at 35-44 (just based on the assumption that there are more 25-34 students than 35-44).

      • JLV

        FYI, I looked into it, and while there was a substantial increase in the within cohort Gini coefficient from 1973-2013 (for size-adjusted household income, it goes from 0.32 to 0.42, but see Burkhauser, et al (J. of Econ. Ineq. 2011) for why these are underestimates), it didn’t look much different from the overall increase in inequality we observe.

        Since GDI includes corporate profits which might not be disbursed as income, d) is possible – Total compensation was 57% in 1973 and 52% in 2013 by my rough calculations using the BEA tables.

        • GFW

          Thanks!

    • GoDeep

      Isn’t it also possible that higher educational attainment is driving a rise in productivity, but the business owners rather than the workers are capturing all these gains?

      Based on Thomas Piketty’s work, we should expect that over time Capital would capture most of the gains in real income given that capital is even scarcer than education credentials. So, yes, this.

      Rather than using median household income which is a really blunt instrument, it would be far better to use actual real incomes broken down by education credential. Based on Census data these graphs show that over the last 20yrs median income has been largely flat, regardless of educational attainment.

  • webnichole

    Does this come as a huge surprise? Credentialing has been de rigeur for colleges and universities since the late 1970s. When I graduated with my BA in 1974 people were already asking me “why would you major in English and History w/ a Philosophy minor?”

    My answer was invariably, “Because I came to college to get an education, not to get a job.” That was generally met with shakes of heads and laughter and “nobody cares about that.” More prominently from the three administrators I knew well at my college.

    Nowadays there seems to be an active push to rid the world of the liberal arts. Just as there seems to be a positive effort to rid the world of any sort of empathy and compassion.

    • NewishLawyer

      As someone who did go to college to get an education (and is proud of it) but I then spent most of my 20s trying to figure out how to make a living and am probably suffering a bit more now because of it; I do have a bit of marvel and admiration at people who knew to major in practical subjects at 18.

      18-year old me would never imagine majoring in business. I would have found that depressing. 34 year old me feels the same way largely.

    • BoredJD

      The liberal arts is still fine…if you’re at a school that, by virtue of your admission, labels you in the minds of the public as some sort of genius. But it’s not the value-add of the education Goldman and McKinsey are buying when they show up to Princeton to interview English majors.

      • NewishLawyer

        Fair point and I went to a school that is seen as elite but not elite enough for Goldman and McKinsey to conduct interviews at. That school was Vassar. Still I suspect most Vassar grads will end up fine. My friends and associates are at varying levels of middle-classness to upper-middle classness.

        Still I sometimes go to young Jewish events in my city (note: this means people up to their 40s if never married) and most of the attendees grew up just as comfortably upper-middle class as I did. They still marvel at the idea of someone choosing to go to a small liberal arts college and majoring in something in the arts and humanities. It feels like they got some sort of secret memo that I did not. So they fathom at my liberal artness as much as I fathom at their practicality.

      • Unemployed_Northeastern

        Of course, on the liberal arts college side, the list of *acceptable* schools for the Goldmans and McKinseys of the world is considerably smaller than the list of acceptable law schools for the Cravaths and DLA Pipers of the world. I went to one of the *best* and most highly-ranked liberal arts colleges, and employers avoided us like the plague, for the simple reason that our name wasn’t Williams, Amherst, Wellesley, or Swarthmore.

        • College Career Counselor

          In part, that’s correct. The other thing to consider is that those companies want to deal in (relative) bulk as far as applications go. I’ve worked at selective schools whose graduates are every bit as qualified as the ones you mention, but didn’t have the number of corporate-minded students to make it worth the while of recruiters to come to campus. At liberal arts colleges, prestige employers want 30 applicants to yield 15 interviews to generate 8 offers/acceptances. What they would typically get is five applicants yielding two offers and only one acceptance.

    • GoDeep

      Nowadays there seems to be an active push to rid the world of the liberal arts. Just as there seems to be a positive effort to rid the world of any sort of empathy and compassion.

      I wouldn’t conflate the two. There’s no obvious connection for starters. Didn’t Hitler study art? And wasn’t that hateful group, the Nat’l Acad of Scholars started by some liberal arts profs?

      • Moondog

        Two different kinds of “arts.”

        The study of liberal arts truly is the same as contemplating empathy and compassion. Whereas fine arts majors are generally fascistic and genocidal.

    • mpowell

      If it was just about credentials, nobody would care what the degree was, just where you graduated (and were initially accepted of course). Turns out, the things you learn during the degree work do matter.

      • cpinva

        “Turns out, the things you learn during the degree work do matter.”

        yes they do. regardless of how “elite” the liberal arts school you went to, and the fact that you graduated #1 in your class, my B.S. in business administration/accounting, will trounce your B.A. in English/art history every day of the week, and two or three times on sunday.

        • mpowell

          I’m not really sure if you’re being sarcastic or not. But if you graduate at the top of your class from an Ivy versus a BS in business from a 2nd tier state school, you’ll still have an advantage. But in the realm of more reasonable comparisons, if I’m an employer, I’m going to hire someone who has the skills I need.

          This education as signalling argument may have a lot of validity to it at the margin, but the vast bulk of education that the population receive has tremendous value for the purpose of building human capital. That’s very much worth remembering. And nobody even disagrees with it. That’s why nobody is proposing getting rid of quasi-mandatory and fully publicly funded through grade 12 education. But that also means you can’t pretend that regarding any and all actual ongoing education debates the human capital modelling aspect of education doesn’t exist.

          • Lee Rudolph

            If I’m an employer, I’m going to hire someone who has the skills I need.

            I’ll do you the courtesy of allowing as how that sentence is true for values of “I” equal to “you”.

            However, assuming it’s true of every employer is tantamount to assuming that every employer is a rational economic actor with complete information, and that’s an assumption that I think is obviously false. In particular, it ignores (what in you preceding sentence you seem not to have ignored!) the obvious fact that employers, being (mostly) human beings, are not immune to acting irrationally under the influence of social markers, their own affiliations and identifications with various groups, and so on—in fact, they often do act irrationally (in those ways and others). Nor do they necessarily have valid information about skills (either the ones they actually need, or the ones a job candidate actually has).

  • JLV

    Two things: 1) unless you adjust for changes in household structure, median household income does not properly reflect per person resources available for consumption. Within household size median income has grown substantially since the 1970’s – the median household income of a two person household was $43,977 in 1975, $57,441 in 2013.

    2) Comparing 1973 to 2013 is probably a bit unfair on cyclical grounds (1977 is probably closer to where we are now in the business cycle, and comparing 1977 to 2013 slightly changes the inference about median income trends.) Although see #1 in re: median income not being particularly useful here.

    • MoMetaBlues

      Yeah I too am suspicious of comparing ‘household’ median income… too innumerate/lazy to look anything up, but I imagine the percentage of married people in the 25-34 cohort in 2013 isn’t anything like it was in 1973, while the 45-54 is *probably* slightly more constant.

      So while

      (approximately 45% of women worked outside the home in 1973, as compared to nearly 60% today)

      how much of that ‘gain’ is ‘lost’ back into a single-income household because of lower marriage rates?

  • NewishLawyer

    How many people went to graduate school in the late 1960s and 70s simply to get a draft deferment? I can’t say I blame anyone for doing this but it could have lead to creeping credentialism.

    I am a pseudo-libertarian and partial-Freudian on this. I think there is a very Civilization and Its Discontents way to viewing this kind of stuff. The extreme wealth and embarrassment of riches of consumer products leaves people with a deep sense of unease. So does office work.

    This explains left and right laments about how we are a nation of consumers, not producers. This ignores the fact that the U.S. does produce a lot but it tends to be stuff that requires some form of advanced education to make. We have moved beyond Model Ts. I also think it explains why luxury condo buildings tend to take their names from the former blue collar factories that used to reside on the same space and the recent rise of hipster culture in valorizing turn of the 20th century somewhat old-timey stuff but more expensively. So you have high fashion based on vintage American workwear (which I kind of like personally) and you also have the recreation of the old-school barbershop complete with straight razor shaves.

    For some reason, many people especially well-educated people seem to think that modern American life is deeply inauthentic. This is probably not very new as a feeling but no one wants to give up modern conveniences and life completely. I know a couple who left the SF Bay Area and purchased a form in upstate New York. They miss PBS and NPR even if they love their farm. We have new versions of Edison Bulbs and interior decor with corrugated steel.

    Note I also like new Edison bulbs and the corrugated steel decor.

    But I am also pretty peachy keen on being a white-collar worker because blue-collar work is very hard and very dangerous. I don’t feel empty from doing white-collar work and think that writing a brief is just as much producing a product as making a table.

    But the cult of “authenticity” still reigns and for some reason “authentic” means somewhat embracing what is seen as semi-rural but more refined blue collar culture with full-sleeve arm tattoos*, carpentry jobs, and small batched goods.

    *I generally dislike authentic as a concept because by necessity it implies something that is opposite is inauthentic. Defining tattoos as authentic ends up being inadvertently anti-Semitic because Jews by cultural and religious and historical tradition are not allowed to get tattoos (and this prohibition is 5000 years old or more!). I am a third generation lawyer, I fail to see how that makes me inauthentic.

    • CSI

      At some point it used to be respectable and okay for middle class people not to go to college. No longer. At some point it changed where if you don’t have a college degree, people assume you are lazy or of low intelligence. Unless you can offer some very good excuses as to why you didn’t go (military service maybe, or being a highly successful self made businessman or skilled tradesman).

      But why do we pretend if we send everyone to college, everyone can get prestigious white collar jobs? If society thinks its desirable for everyone to get a degree, so be it, but then society has to accept a large number of graduates are going to wind up doing fairly menial or laborious work (and college fees should be set accordingly).

      Yet when we find out someone with a degree is working as a janitor or taxi driver, for example, the normal response is “what a waste, what a shame”. But of course if you send a large proportion of the population to college, this is going to be inevitable.

      • John Revolta

        Well, it’s only a waste and a shame if your janitor or taxi driver got himself a business or law degree and can’t do anything with it. On the other hand, if he got an English or History degree- that is, an education- he’s much more likely to be a happy (rather than a miserable, angry) person.

    • Dennis Orphen

      A friend once suggested that those bearded yet impeccably groomed gentlemen wearing immaculate retro workwear need to have real grease and dirt thrown on them when they appear in public in the same way that animal rights activists once threw red paint on people wearing furs and leathers.

  • jake

    Paul, do you know what a median is?

    Even if having a bachelors degree doubled your income, increasing the fraction of people with one from 8% to 23% would be predicted to have effectively no impact on median income.

    • Moondog

      Dude, dumb it down for those of us who only have bachelor’s degrees please.

      • FOARP

        His point is that the people who hold batchellors likely aren’t at the median but above it. If their income increases (and there is no trickle-down effect) this does nothing to change the median income.

        I guess you know this already, but the median income is the one you would get if you lined up everyone in order of how much money they receive and ask the people in the very middle of the line what their income is. If people further up the line are making more money, that won’t change the answer you receive.

        Campos is arguing that the gaining of educational credentials doesn’t increase income by itself, however the evidence he’s using doesn’t show that, because the median person (in terms of education) in 1973 had a high school diploma but not a university degree and this is still the case. Assuming the median household is made up of adults who are at the median for educational acheivement, showing that the median income has not changed proves nothing since the median educational credentials have not changed.

        Or hell, you may have just been commenting sarcastically, in which case I just walked right into it.

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  • ichininosan

    Friedman’s developing country in Asia taxi-cab observations offer no lessons for the developed world. The average potential taxi cab driver in Mumbai might be able to achieve the better life of the average Singaporean if he/she acquires an educational credential and if the government tamps down corruption and builds infrastructure. But for the average potential taxi driver in New York the value in acquiring an educational credentials is not obvious:

    “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.”

    The value of a sheepskin depends very much on whether everybody else has one.

  • JCougar

    Fantastic analysis.

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  • ConcernTroll

    I think the signalling vs value of credential is a valid argument. I think it varies by profession. Law and finance seem to be signal dominant while STEM maybe less so.

    On the issue of income, another way is look at the wage premium for a college graduate which has gone up by almost 50% in the last 20 years. Of course, this is not due to better opportunities for college graduates but rather the complete collapse of income for households headed by high school graduates.

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