Inequality and the race between education and technology

A key contributor to income inequality is the wage premium for a university education. Workers with a bachelor's degree or higher earn much more than workers with higher school or less education. This wage premium partially arises from increased human capital (better skills and training), and partly from signalling (for more on this point, you should read Bryan Caplan's The Case Against Education (which I reviewed here; see also this 2019 post on the returns to dropping out of university).

How much does the university wage premium contribute to inequality? This 2020 article published in the American Economic Review Papers and Proceedings issue (ungated earlier version here) by David Autor (MIT), Claudia Goldin and Lawrence Katz (both Harvard University) provides some answer for the U.S.

The underlying framework of their analysis is interesting in its own right (and was the subject of this 2010 book by Goldin and Katz, which I hope to write about once I finally get a second-hand copy of it next month). The framework is the 'race between education and technology', which was first described by Nobel Prize winner Jan Tinbergen in the 1970s. Essentially, on the one hand skills-biased technological change increases the demand for highly-skilled workers (i.e. university graduates), and tends to push up wages and the university wage premium. On the other hand, increasing numbers of university graduates increase the supply of highly-skilled workers, and tend to push down wages and the university wage premium. The evolution of the university wage premium over time then reflects the race between higher education pushing down the premium, and technological change pushing up the premium. Looking back in time, you can make similar arguments in relation to the high school wage premium (when a high school education was far less prevalent than it is today).

The 2020 article by Autor et al. uses data from various sources covering the period from 1825 to 2017. They first show that:

Rising educational wage differentials characterized the period from the 1820s to 1914, not unlike that in more recent history.

The high school movement, starting around 1910, then produced a large decline in the high school wage premium from 1914 to 1960. The college wage premium also narrowed from 1914 to 1950. But then, in a real roller coaster ride, the college wage premium rebounded in the 1950s and 1960s, narrowed in the 1970s, and then soared post-1980. The college wage premium today exceeds its high level of 1914.

Their model of the race between education and technology seems to fit the data on the evolution of the college wage premium reasonably well. They then turn to looking at the contribution to inequality, restricting their attention to the period since 1980, which is of interest because of the consistent increase in income inequality in the U.S. over that time. They find that:

Wage inequality increased at about the same rate from 1980 to 2000 as from 2000 to 2017. But the college wage premium increased far more rapidly in the first period than in the second. The rise in the returns to college education explains a far larger share of the increased log hourly wage variance from 1980 to 2000 than it does from 2000 to 2017, accounting for 75 percent in the first period but just 38 percent more recently.

The canonical two-skill model of the RBET explains the lion’s share of the enormous increase in wage inequality from 1980 to 2000, when the slowdown in the growth of the relative supply of college workers produced a sharp rise in the college wage premium. But most of the recent rise in wage inequality has occurred within, rather than between, education groups.

There are many contributing factors to the underlying level of inequality in society (as I noted in this recent post). The university wage premium (and its underlying driver, skills-biased technological change) is only one contributing factor. It is really interesting though, that it's contribution to U.S. inequality has fallen over time. That points to other structural changes in the labour market, globalisation, and government policy changes such as deregulation, etc. as having contributed more in recent years.

[HT: Marginal Revolution, last year]