US graduates suffer income inequality

US graduates suffer income inequality
By Krishna Guha and Alex Barker in Washington
Copyright The Financial Times Limited 2007
Published: June 4 2007 22:38 | Last updated: June 4 2007 22:38


Earnings of the average US worker with an undergraduate degree have not kept up with gains in productivity in recent decades, according to research by academics at MIT that challenges traditional explanations of why income inequality is rising.

The findings, which will be presented to the New America Foundation on Tuesday, come amid widespread unease about the sluggish trend in middle class income growth, both in absolute terms and relative to the new superstar class of chief executives, hedge fund managers and other financiers.

While in the short term labour market conditions are now good for most US workers, the state of the “American dream” is already emerging as a big theme in the run-up to the 2008 presidential election.

In a recent speech, Hillary Clinton, the Democratic frontrunner, complained that “while productivity and corporate profits are up, the fruits of that success just hasn’t reached many of our families . . . It’s like trickle-down economics but without the trickle.”

Meanwhile, John Edwards, the former senator, has made “eliminating poverty within 30 years” a centrepiece of his left-leaning campaign, which stresses the problems of inequality in the US.

The Massachusetts Institute of Technology economists, Frank Levy and Peter Temin, repeat earlier findings that the gap between the earnings of the average university graduate and high school graduate – which was stable for much of the 1960s and 1970s – expanded relentlessly from 1980 to 2000, before slowing a little in recent years.

This is consistent with the conventional explanation that the rise in inequality is largely due to technology trends that disproportionately benefit skilled workers.

But Mr Levy and Mr Temin go on to show that, while graduates certainly did better than non-graduates in recent decades, the average graduate also failed to keep up with gains in economy-wide productivity, once those productivity gains are adjusted for the composition of the workforce.

Male graduates in particular failed to capture a full share of productivity advances, with female graduates keeping pace until the last five years – probably due to increasing opportunities for women in the workplace. This casts doubt on the conventional argument that the solution to rising in-equality is to improve the standard of education across the workforce as a whole, and encourage more people to go to university.

“Is the average bachelor’s degree still sufficient to catch the rising tide? In the case of men at least, the answer is no,” the authors conclude.

They point out that rising inequality may still be caused by “skill-biased” technical change – but of a kind that disproportionately benefits the very skilled, rather than the merely educated.

If so, this creates a huge headache for policymakers because while it is in principle at least possible to greatly expand the number of basic college places, it is not possible to send every worker in the US to Harvard Business School.

Mr Levy and Mr Temin argue that the failure of workers even with undergraduate degrees to keep up with productivity is due to a change in labour market institutions and norms that reduced the bargaining power of most US workers.

They argue “only a re-orientation of government policy can restore the general prosperity of the postwar boom”.

The paper follows the presentation last week of joint Pew/Brookings Institution research showing that men in their 30s earned on average 12 per cent less in 2004 than their fathers did in 1974 after adjusting for inflation.