Investment in Education: The Upside of Inequality

Much of the increase in income inequality over time reflects the rising wage premium for a college education, which is beneficial and desirabe according to Nobel economist Gary Becker and his co-author Kevin Murphy in their article "The Upside of Income Inequality Excerpts:

To show the importance to inequality of the increased return to human capital, consider the top chart above, which shows the link between earn­ings and education by displaying the wage premium received by college-educated workers compared with high school graduates. In 1980, an American with a college degree earned about 30% more than an American who stopped education at high school. But, in recent years, a person with a college educa­tion earned roughly 70% more. Meanwhile, the premium for having a graduate degree increased from roughly 50% in 1980 to well over 100% today. The labor market is placing a greater emphasis on education, dispensing rapidly rising rewards to those who stay in school the longest.

This trend has contributed significantly to the growth in overall earnings inequality in the United States.

When calculating the returns to education, we look at the costs of education as well. And even accounting for the rise in university tuition (it more than doubled, on average, in constant dol­lars between 1980 and 2005), overall returns to college and graduate study have increased substan­tially. Indeed, it appears that the increases in tuition were partly induced by the greater return to col­lege education. (See bottom chart above that shows the increase in enrollment closely following the increase in the wage premium for a college education.)

We conclude that the forces raising earnings inequality in the United States are beneficial to the extent that they reflect higher returns to invest­ments in education and other human capital. Attempts to raise taxes and impose other penalties on the higher earnings that come from greater skills could greatly reduce the productivity of the world’s leading economy by dis­couraging investments in its most productive and precious form of capital—human capital.