Education and Income Inequality

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Steven Strauss , Contributor John L. Weinberg/Goldman Sachs & Co. Visiting Professor at Princeton University

The Connection Between Education, Income Inequality, and Unemployment 11/02/2011 11:54 am ET | Updated Dec 06, 2017

High and rising income inequality in the United States has

recently been widely commented upon. What has not

been as widely discussed is the role educational

attainment has played in these disparities. Indeed,

America is in some ways two di!erent countries

economically, segregated by educational achievement.

Table 1 below shows a significant relationship between

income levels and educational attainment. Basically, the

higher the education level, the higher the income. For

example, people with professional degrees earned 6x as

much as people who did not graduate from high school (in

2009: $128,000 vs. $20,000).

However, this is not just an income e!ect. Table 2

demonstrates that US unemployment rates and

educational attainment are also strongly related to each

other. The better educated the group, the lower the

unemployment rate — and this striking result is consistent

over a ten-year period and is highly significant. These

figures strongly suggest weak demand in our economy —

over a long period — for less educated workers, and

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greater demand for more educated workers. Even

assuming an imperfect labor market, this indicates rising

wages for workers in demand (high educational

attainment), and weak-to-flat wages for workers not in

demand (low educational attainment).

At the extremes, if you have less than a high school

education, you’ve spent the last 10 years in a recession —

with the lowest unemployment rate being 7%, and the

highest reaching 15%. If you have a four-year college

degree and at least some graduate school, recessions

have been mild — with current unemployment rates of

4.5%, compared to an overall rate of 9%.

In many ways, our two economies have created two

separate societies. Those with low educational attainment

drift permanently between recessions and depressions,

with little stability. Those with high educational attainment

experience increased wealth, only mild recessions, and

interesting projects with personal growth.

Additionally, these numbers suggest that our lack of

highly-skilled knowledge workers is a major binding

constraint on the growth of the American economy. In

2006 and 2007, unemployment rates for the highly-skilled

group were as low as 2% — a figure viewed as basically

beyond full employment. These results also imply that

further economic growth in 2007 would have resulted in

even higher wages (and more income inequality) for the

more highly educated group.

Interestingly, it appears that high school students are

already reacting to these price signals from the market. In

2000, 63% of high school completers enrolled in college.

By 2009, this number approached 70% (SAUS, Table 276).

Some potential policy implications:

". Finding employment for older workers with limited educational attainment may be challenging. A significant number of people may prematurely

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withdraw permanently from the labor force.

#. The next cyclical economic upswing will likely again see shortages of highly-skilled workers. Visa reform allowing increased importation (or retention) of ‘top talent’ would greatly benefit our economy, by reducing a major constraint on economic growth.

$. Most flat tax proposals appear to only increase income inequality (by lowering taxes for higher income groups) without addressing the structural unemployment issues.

With due respect to our presidential hopefuls — flat taxes,

regulatory reform and fiscal austerity don’t address a

major cause underlying income inequality and

unemployment. Instead, their proposals might just make

things worse.

Table 1: Mean Earnings by Highest Degree Earned, $:

2009 (SAUS, table 232)

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