The Income Gap and Education

The gap between the incomes of the richest and poorest Americans has been widening since the 1970s. According to a recent New York Times column by Tyler Cowen, the widening gap reflects the difference in earnings growth between high-skilled and low-skilled workers—the earnings of high-school graduates grew more slowly than those of college graduates. A recent paper by Harvard economists Claudia Goldin and Lawrence Katz suggests that immigration accounts for only a small part of the relatively slow earnings growth among high-school graduates.

According to Goldin and Katz, developments in the market for high-skilled labor better explain the growing income gap than developments (such as illegal immigration) in the market for low-skilled labor. Technological improvement typically leads to rising demand for the high-skilled workers capable of using the new technology. Over the past few decades, technological change has increased demand for highly skilled workers, but the supply of such workers has remained stagnant. Strong demand growth coupled with weak supply growth has led to unusually high wage gains for high-skilled workers (as illustrated in the graph above). Read Cowen's column to learn more.

Discussion Questions

1. According to Cowen, how does the educational attainment of the current generation compare to that of their parents?

2. Why has the supply of high-skilled labor increased so slowly? What policies does Katz recommend to remove the bottlenecks that keep Americans from obtaining more education?

3. Will a more educated population guarantee a decrease the income gap between the richest and poorest Americans? What is the rather unpredictable role of technological change in determining the size of the income gap?

Economist Joel Waldfogel's latest Slate piece focuses on an alternative approach to promoting educational attainment among low-income groups. Recent research by Nobel-winning economist James Heckman and University of Michigan economist Dimitriy Masterov suggests that government spending on preschool education offers bigger returns than spending on other parts of the education spectrum (like GED programs or efforts to reduce high-school class sizes). Compared to disadvantaged kids without preschool exposure, disadvantaged kids who received preschool education tended to perform better later in life—higher grades, more likely to graduate, more likely to be employed, less likely to commit crime, and less likely to be on public assistance. Read Waldfogel's column to find out more.

4. Could diverting education spending to intensive preschool programs reduce the income gap between rich and poor Americans? How do differences in cognitive development at kindergarten age feed into differences in earnings potential later in life?

5. Positive externalities occur when we do things that are good for us, but also inadvertently good for others. Preschool provides private benefits directly to families and kids, but it also provides social benefits to the rest of us—social benefits that the parents of young children do not account for when deciding whether to pay for preschool education. What are the social benefits of preschool? Why might government intervention lead to a more efficient preschool outcome?

Here's another Aplia perspective on the disparate wages of low-skilled and high-skilled workers.

Who Wants to Be a Harvard Grad?

It's getting tougher and tougher to get into Harvard. The admissions rate—that is, the fraction of applicants who are accepted—has been declining for decades. And you don't need an 800 on your math SATs to figure out why: the number of spots at Harvard has remained roughly the same, while the number of applicants has soared. But why has the number of applicants soared? And should it be soaring?

As with all economic questions, the answer comes down to costs and benefits. The social and economic benefits of attending Harvard are large. To spend four years among the "best of the best" (by some measures, anyway) is an exhilarating experience. And in what Robert Frank calls our "winner-take-all society," going to an elite school may be a necessary first step if you want to compete for the kind of positions (Supreme Court justice, CEO, Nobel Prize winner) that only a microscopic proportion of the human population ever obtain. But these benefits are roughly the same as they have always been: indeed, students can now choose from many more excellent colleges than they could in the past.

In the meantime, what has happened to the cost of getting into Harvard? Harvard alum Michael Winerip recently wrote an essay in the New York Times on how the young people applying to his alma mater now are, on paper at least, much more accomplished than he was at their age. But many of their accomplishments—from a string of 5's on AP tests to touring Europe with youth orchestras—are the result not of increased inner drive among college-bound students, but rather of a nascent industry designed to help students get into college. Winerip writes that, as an alumni interviewer, he interviewed a girl who worked at NASA doing research on weightlessness in mice; his project in high school, by contrast, was a shoebox with soil and bean sprouts. And while some of the students he has interviewed take 10 AP courses and get top scores on all of them, he took a single AP course and scored a 3. However, he writes,

Of course, evolution is not the same as progress. These kids have an AP history textbook that has been specially created to match the content of the AP test, as well as review books and tutors for those tests. We had no AP textbook; many of our readings came from primary documents, and there was no Princeton Review then. I was never tutored in anything and walked into the SATs without having seen a sample SAT question.

As for my bean sprouts project, as bad it was, I did it alone. I interview kids who describe how their schools provide a statistician to analyze their science project data.

Reading Winerip's essay, it may seem as though the costs of getting into Harvard have skyrocketed—but in fact, if one thinks about this like an economist, it quickly becomes clear that the opposite is true. The price of preparing any one element of one's résumé has in fact decreased: for example, one can now buy a textbook that is keyed to the AP test, whereas before, students didn't have access to those resources.

However, total expenditure on college preparatory activities has increased dramatically. This is because, as the law of demand would predict, the lowered cost of achieving specific goals leads to more people attaining those goals—and therefore drives up the number of people applying to Harvard. Furthermore, as more people do the things that used to get you into Harvard, students have to do more and more to set themselves apart from the rest of the crowd.

Discussion Questions

1. Winerip laments the fact that many of these driven students are missing out on the fun of childhood. Is it efficient (in the economic sense of the word) for so much effort to be devoted to getting into college? What are the costs and benefits of this kind of competition?

2. Use a supply-and-demand model to illustrate what has happened in the market for college preparatory activities (tutoring, mentoring, test prep). Note that the probability of getting into Harvard is both dependent on the outcome of that market and a determinant of demand in that market. How is an equilibrium reached that takes both of those factors into consideration?

3. What effect does increased competition for elite schools have on other schools? Is it easier or harder to get into a good state school because of all the competition to get into Harvard? What about the effect on tuition, both at elite schools and other schools?