Returns to Education … a Myth?

I feel I should comment very briefly on the rising debate about “returns to education”. The issue is that, for a few years, the accepted wisdom has been that the American economy has become subject to a widening meritocracy. Workers who have an education are widely reported to earn significantly more than their less educated fellow workers. This position has gone largely unchallenged. Indeed, the opposite is true, the value of an education is taken for granted: these supposed “returns to education” [in economist speak!] are used to urge us all to encumber ourselves with ever more expensive education, and to encourage socio-economic policies that favor so-called knowledge workers over and above other workers. In many ways returns to education have become a rallying cry for advocates of the post industrial globalized economy that we find ourselves entangled in.

There are problems with the argument that are only now surfacing.

First, there is the small problem of education cost inflation. Most of the studies that purport to prove that educated workers outearn their compatriots are dated. They were conducted before the prolonged run-up in education prices we have seen over the last decade. Education costs have surged way ahead of earning power, so we can assume safely that the earning advantage has been eroded somewhat, if not eliminated at least temporarily. Further, the run up in costs has not discernibly been associated with a concomitant improvement in education quality: we are paying far more for the same old thing which implies a drastic loss of productivity in the education sector.

Second, the laws of supply and demand presumably still apply to educated workers: as people became more aware of the advantages of education [real or not], more of them pursued an education. This created a flood of educated workers. The question then to be asked is whether the economy generated enough jobs to absorb this new supply, or is there now an over-supply which would result in the bidding down of the returns to education? Anecdotal evidence suggests the latter.

Third, there is now new research to show that the empirical evidence was misinterpreted. Returns to education, it seems, are heavily concentrated on the very highest educated. Those with sophisticated educations from better quality schools gain a disproportionate share of the returns. This is intuitive. All those Ivy Leaguers are clearly getting better returns than their community college friends, and the post-grads are getting more than the B.A. crowd. So there is a return to education, but it is focused on the very top of the tree. For the rest the effort and the expense are scarcely worth it: wages for college graduates have barely risen over the last few years.

So is a policy to encourage education misleading? I don’t think so. I have to agree that America will need to compete more on its guile than on its brawn as globalization removes many of the advantages it was able to hide behind before. This means making sure that its workforce is competitively educated. But will this mean that the workforce will be better off because it is educated? Not necessarily. Unregulated consequences of globalization will enable a small elite to garner most of the returns: they are the cosmopolitan, “trans-national” types [e.g. the New York – London bankers and fashion designers etc who we call ‘NYLONS’!] who have skills in demand world wide. Globalization will put downward pressure on general wages for years to come . The educated middle class will not be immune to that pressure. So returns to education, a concept we adopted because it appeared to be true during the immediate post World War II era, will most likely be diminished for the majority, but enhanced for the few. Sounds like a lot of other things going on around here.

Lucky few!