The Causes of Wealth Inequality (7): Education and Demographics

First education. Many people believe that increasing income inequality in countries such as the U.S. should be blamed on immigration: low-skilled workers have to compete against low-wage immigrants with similar skills. However, immigration’s effect on wages is one of the biggest political myths out there. If you want to understand the income stagnation at the bottom of the income distribution – mostly unskilled workers – you have to compare this group of people, not to immigrants, but to the high earners.

Starting about 1950, the relative returns for schooling rose, and they skyrocketed after 1980. The reason is supply and demand. For the first time in American history, the current generation is not significantly more educated than its parents. Those in need of skilled labor are bidding for a relatively stagnant supply and so must pay more. … In contrast, from 1915 to 1950, the relative return for education fell, mostly because more new college graduates competed for a relatively few top jobs, and that kept top wages from rising too high. Tyler Cowen (source)

Hence, income inequality rose not because of downward pressure on the lower wages (supposedly caused by immigration) but because of upward pressure on the higher wages (caused by increasing returns for schooling, which are in turn caused by stagnant supply of high education). That means we can do something about income inequality. We can improve education levels, diminishing inequality both at the bottom – by giving low-skilled people a better education and hence a better income – and at the top – by reducing the scarcity of supply of the higher educated and hence lowering the relative wages at the high end.

Now to demographics.

In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes. … Since the United States is growing older … income inequality will naturally rise. Tyler Cowen (source)

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