Education’s Effect on the “Wage Gap” A hot-topic that continues to be a point of emphasis across not only the United States economy but the world economy as a whole is the ever-increasing gap between the upper-class and lower-class. The recent recession in the United States has intensified the subject seeing the top one percent of incomes in the country rise 20% in 2012 as opposed to some other lower-class incomes falling as much as 18% throughout that same timeframe. Other countries have seen similar issues between the two classes and the path toward extinction for the “middle-class.” In-order to combat this trend, some countries have instituted economic policy changes specifically around education. The following will explain how education and the wage gap are related, what the situation is currently in the United States, and what other countries are doing to combat the wage gap which the U.S. can learn from. In order to understand how education has an effect on the wage gap, it is first important to understand the labor market and how wages are determined. “The Marginal Productivity of Labor” is the additional output produced by the addition of one more labor worker holding all other inputs fixed. “The Law of Diminishing Marginal Productivity of Labor” says that the more workers there are (again, holding all things constant) the lower the total productivity per worker will be. This is comparable to having a factory with only one machine. If more machines are not ordered, but more workers are hired to operate the original machine, the new workers will be less productive because the machine only needs one person on it to operate. How does this affect wages? This affects wages because the labor demand and supply work the same way. Labor demand is how much labor a firm wants to employ at a given wage. Labor supply is how much labor a worker is willing to supply at a given wage. In the labor market, higher wages bring excess supply which leads to unemployment. Lower wages bring excess demand which leads to workers finding new jobs. Similar to Marginal Productivity of Labor, the Marginal Revenue Product measures the extra revenue produced by one more worker hired. Companies strive to reach an equilibrium with the wages they offer their employees and the amount of employees that make up the company’s workforce. Reaching this equilibrium creates the maximum profit the company can realize. Shifts in labor demand and labor supply can cause widening wage inequalities and has been a large reason for the current wage gap in both the United States and across the world. Shifts in both labor demand and supply are rare, but they have happened in the past. The labor supply in the U.S has increased since 1970 as the infamous “baby boomers” joined the labor force. Labor demand has also increased during this timeframe; however, what is important to note is this: The labor demand has only increased for more skilled labor over the past 40 years. More skilled labor alludes to jobs requiring higher levels of education (college, graduate school, etc.). This is where the root cause of the widening wage game takes place.
The biggest reason for the increased demand for higher skilled laborers is from the continued increase in technological tools in the workplace; however, as the labor demand for skilled laborers has increased, the labor supply of those higher skilled laborers has not as drastically as the demand. Back in the 1970s, as the baby-boomers entered the job market, getting higher levels of education was not as popular as it is today. Baby boomers tended to enter the job market as less-skilled laborers. As the demand for high-skilled laborers increased, demand for low-skilled laborers, in turn, decreased; yet, the supply of low skilled laborers increased drastically with the baby boomers, while the supply of high skilled laborers increased only subtly.
The supply and demand shifts in the labor market has resulted in American income wage inequality expanding rapidly over the last 20 years. Companies are willing to pay higher wages to the more skilled laborers because the demand is so much higher than the supply. This leads to the higher educated worker continuing to get significant wage increases while the lower educated worker struggles to get raises at all. A study from David Autor, Lawrence Katz, and Melissa Kearney titled “Trends in U.S. Wage Inequality: Re-Assessing the Revisionists,” shows how the real wage increases for levels of education vary drastically. Between 1963 and 2005, workers with 12 years of schooling (graduated high-school) saw a 16.8% wage increase during that timeframe; however, workers with 16+ years of schooling (graduated college) saw a 43.3% wage increase. That is a 25.5% disparity!
Based on the Plama ratio, United States is ranked worse than countries like Pakistan and Nigeria in having a wide income wage inequality- and it is the most unequal of any developed country measured. What this means is that the gap between the rich and poor is large and it is growing. Physical implication can be seen through the recent protest the media has dubbed as the 99-percenter. Various complaints about the economic situation, arising from recession, have caused a deep concern in the underlying health of the American economy. The Department of Health and Human Services reports one out every seven Americans now relies on food stamps. The anemic job growth is compounded by the poor quality of jobs that are available which have declining earnings and benefits. Recent employment is concentrated towards more menial jobs such as retail sales, hospitality, and office clerks. Additionally, Princeton University economist, Henry Farber, found that people who found new positions after losing their current job during the recession earned on average 17.5% less in the new position.
While jobs among the bottom 99 percent have gotten worse, at the same time, the top one percent of the American population saw, just in 2012, a 20 percent increase in their wealth- numbers not seen since the great depression. This number is reflected in the growing claim on the total wealth of the United States; according to Nobel Laureate Joseph Stiglitz, the richest one percent of Americans own 40 percent of the nation’s wealth- a stark difference from the bottom 80 percent of American earners who own 7 percent of the nation’s wealth. This disparity is not as bad as many of the nations in South America and in China, but it is growing at an alarming rate. If the rate is not reconciled, it will become a growing social and impending economic issue.
Public policy created in Washington is not the only reason why we see the increase in income wage disparity; weakened unions, increase reliance on technology, and furious labor competition from abroad that cause jobs to move overseas are all culprits in the rising disparity. Income disparity is not a new concept in the United States and, throughout the course of history; the United States has combat the issue on various channels; one being, increasing public investment in education. The American educational system is pivotal in understanding the income disparity we see in the American economy. A poll conducted by the College Board and National Journal; found that 46 percent of 18 to 29 year-olds find college education is not needed in order to be successful. Despite this belief, college graduates are likely to earn twice as much as high school graduates. The Organization for Economic Cooperation and Developments states the higher payoff, less the cost of going to a four-year university, is worth $365,000 throughout the individual’s professional career. An analysis developed by economist, Lawrence Katz and Claudia Goldin, argues that the progression of technology demanded for the highly skilled labor force drives low skilled workers out. This demand disparity and the addition of the low graduation rate have been large contributors in driving the income gap. This phenomena is backed by the Bureau of Labor Statistics that predicts the labor market from 2010-2020 jobs that will require “postsecondary education for entry level” are projected to grow the fastest. Furthermore, of the 30 occupations listed as the fastest growing, 17 need higher level of education.
The implication of these statistics asks for a greater public investment in education within the nation, however, investments need to look through broad channels of education. This includes apprenticeship and technical training to driving the cost down of a four-year institution and improving the quality of primary education.
Education does play a huge role in the effort to counter income disparity. Providing equal opportunity, raising minimum wages, providing public policies the help alleviate the concentration of wealth from the top are all key components required in assisting the reduction of income disparity.
An extreme example of educational policy reform to improve income inequality is rooted in China. With a dispersion of low skilled workers in provincial communities and highly skilled workers in urban areas, China joined the E-9 in 1993, a group of countries that represented over half of the world's population and 70 percent of the world's illiterate adults. The dispersion of skills among these countries was keeping them from seeing optimal GDP growth and so the E-9 set out to work together towards a common goal of broader educational reform.
The root of the disparity in the skilled labor force in China can be traced to the late 16th Century, when primary education was grounded in Confucianism. Confucianism was a privilege held only for the elite wealthy or rulers1. During the Han dynasty, the first nationwide civil exam was set up and provincial schools were able to access education. The government’s main selling point for the common man to get an education was move into the upper class. According to the China Education central website; it was said that, “To enrich your family, there is no need to buy good land: Books hold a thousand measures of grain.”
Thousands of years later, China expanded educational policy to include things like foreign languages, mathematics and science to be more competitive with the growing global intelligence among other countries. By 1946, however, there were still only 1,300 kindergartens and an abysmal number of provincial schools available. In 1985-86, the government put control of education in the hands of local communities and made it a legal mandate to attend. This focus on local economy was a result of the combined efforts of the Ministry of Education and Ministry of Finance who suggested that the development of the local economy and advancement of culture and ethical living standard of the people would promote broader economic growth for the country. According to an article in the Hindustan Times, by 2010, the number of kindergartens grew to 138,209. The rate of the adults who could read increased to 91 percent in 2001, up from 77 percent in 1990. As of today, China now has the highest rate of compulsory education among the E-9.
While educational attendance has risen and illiteracy has fallen, the income gap in the country has persisted, particularly between rural and urban communities. Rural community incomes are less than 1/3rd of those in cities, with the top 10 percent earning about 23 times that of the poorest 10 percent according to Dexter Roberts, a reporter on China’s growing income inequality. The cost of education (in addition to costs for things like retirement and medicare) is believed to be a continuing factor to this income gap as rural workers cannot afford to attend school. The income gap has held back potential economic growth in two ways; 1) by reducing the income of lower skilled workers who are in low demand, thus reducing the potential government revenue and 2) by reducing the confidence Chinese citizens have in their future, expected quality of life. Despite double digit economic growth, China economists believe that the citizens’ perspective that their quality of life is poor is a major factor hindering future GDP growth.
To battle this growing inequality gap, the government has put forth new educational policies. One includes a mandate to fund 9 free years of education within a detailed policy on how to further eliminate illiteracy in rural areas2. China is also executing certain fiscal policies including the plan to boost the minimum wage in most parts of the country to 40 percent of the average salary by 2015. This boost of minimum wage would raise the income of the unskilled labor force potentially helping to close the gap. The higher wage could also, however, deter some foreign countries from outsourcing labor to China and is, therefore, a heated topic of debate.
While not quite as old as China, the United States as a similar history in educational reform. Issues such as whether to focus more on social-cultural education as opposed to traditional Math or Science has been debated the United States just as Confucianism once was debated in China. Disparity between rural communities has also been a challenge which each country has faced to varying degrees of success. Lastly, the government’s push to motivate the blue collar community to exceed their expectations and live up to the “American Dream” has certainly been true in the United States just as Chinese government once did much the same.
After WWII the primary and secondary education systems in the United States were built for a certain fraction of the population to enter the white collar, blue collar and agricultural workforce. For roughly 20 years, that concept worked until standards of living grew substantially due to the increase in GDP and increase in production of highly educated workers through universities. Many university students used government grants like the GI bill to pay for their education while others were heavily subsidized by the federal and state governments. Exam scores at the elementary and secondary level were exceptionally high on a global level, including in STEM (science, technology, engineering and math).
In the 1970s, the educational pedagogy took a major shift away from the core subjects of STEM and started emphasizing the arts, social-emotional learning and creativity, a great deal more. This shift gave way to a major infrastructure change. Schools were looking inward when creating curriculum and then the baby boom slowed, so schools building development slowed. This ultimately resulted in a massive reduction in the quality (education and selectivity) of the teaching force.
In 1990, in reaction to many of the aforementioned changes, Minnesota created the first charter school-public schools that were not run by the public school system, but by nonprofit (sometimes for-profit) institutions. This led to a wave of changes including a focus on standardized testing as a measure of student aptitude and school success as well as teacher performance.
The United States is now in the middle of a major battle between two extremes that both believe that the 'system' is broken: the traditionalist teacher union-backers who think standardized testing is ruining education and the reformers who believe that the US needs innovative models and pilots to become globally competitive once again. These reforms would, in effect, increase the supply of the skilled labor force bringing about equilibrium in the labor market which could mitigate the widening wage gap.
Many of the reforms discussed in the United States are not so unlike those in China. Teach For America, for example, was created roughly 25 years ago to revitalize the human capital element of education particularly in the neediest of schools. TFA recruits higher-than-average talented individuals to teach in these schools; often focusing on rural communities in a very similar manner as China focuses on rural illiteracy as a means to increase GDP and slow their own wage inequality.
In an attempt to strengthen our educational system, the following are at the forefront as school level experiments: * Rocket Ship - charter school network on an extreme growth trajectory that is all about blended learning (mix of computer learning and teacher instruction) * KIPP (Knowledge Is Power Program) and YES! Prep - network of charters that is typically the highest performing in their category, very rigid and disciplined approach, and almost always in the most impoverished communities in America. * TEP (The Equity Project) - charter in NYC that pays teachers at starting salary of $125+bonus. The catch is that many admin and maintenance staff positions do not exist so teachers have additional duties other than teaching. Also, it’s required that teachers have performed around 98% or higher on a graduate level standardized test
We need a national shift in the way we view education and teachers. It's seen as a third-rate profession and is therefore given a third-rate salary and social class. Parents are fine sending a kid to school and saying that it's the school's job to educate, not the parents'. The most educated countries and families not only support schools through volunteerism and interaction with teachers, they also spend a great deal of their disposable income on tutoring courses - this is prevalent in Korea, China, and India amongst other countries.
Finally, learning modalities and how different people understand content are very important. In the 1950s it was all-didactic; the teacher could literally read off of a script and if you didn't understand what s/he was teaching, you were essentially simple and were probably destined for factory work. Now, we understand that children (and adults) have massively diverse communication styles and teachers need to adapt to these styles to effectively communicate to all learners. This subject, called differentiation, is one of the toughest things to get right as a teacher but the most critical for successfully communicating lessons to students. Education plays a big role in the context of income wage inequality. While education alone will not resolve the disparity, it needs to be considered as part of the bigger solution. The American government needs to consider the cost in education as an investment that will help fuel and drive the middle class and hence forth provide a stronger and sustainable economy.

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