The Overselling of Education

In discussing rising inequality in the United States, Federal Reserve Board Chair Ben Bernanke recently said, "It's a very bad development. ... It's creating two societies. And it's based very much, I think, on educational differences."

A better-educated workforce is widely touted as the panacea for every economic problem. Education is said to be the cure both for unemployment and income inequality. To hear leaders of the financial sector talk, the underlying problem with the economy has not been a runaway financial sector but an unqualified workforce. In a recent Reuters special report on the U.S. economy, Diane Swonk, an oft-quoted financial-sector economist, said, "The recession merely revealed a reality that has been with us for a long time. We faced a growing gap in education and skills that we tried to fill with debt and credit, which gave us the illusion of growth."

Or consider the statement of the Minneapolis Federal Reserve Bank president, Narayana Kocherlakota, which removes monetary policy as any part of the solution to current high unemployment:

This is very comfortable reasoning for the very comfortable class. It identifies "failing" schools and dumb workers for the economic calamity actually caused by a deregulated financial sector following a massive redistribution of income and wealth. This shift was driven by corporate political power that allowed the top 1 percent to capture some 56 percent of all the income growth over the two decades preceding the Great Recession.

Blaming inequality and joblessness on worker skill deficits is an old alibi. In 1987, the Reagan administration's Workforce 2000 report foretold future "skill mismatches." In 1990, George H.W. Bush's secretary of labor, Elizabeth Dole, said, "America faces a workforce crisis where there is a diminishing number of people eligible and qualified for the ever-increasing complexity of jobs in our economy." Many panels, such as the Commission on the Skills of the American Workforce, warned around that same time of the need to radically up-skill our workforce or face long-term income and productivity stagnation.

The Clinton administration echoed this theme, saying more education was needed for workers to adjust during a "transition" to a new economy. It must have been a surprise, therefore, that in the mid-1990s there was a sharp uptick in the economy's productivity that has lasted for 15 years and was accomplished with the very workforce that allegedly put our nation in danger. In the late 1990s, when labor markets were tight, the supposedly unqualified lower-skilled workforce enjoyed solid, real wage gains.

Are the Unemployed the "Unqualified"?

It is remarkable that anyone can claim that today's high unemployment is primarily due to a mismatch between the skills of the unemployed and the available jobs. After all, most of those who are unemployed today were productively employed just a year or two ago. The notion that production processes have radically changed is hard to square with the absence of a surge in productivity or investment. There have been roughly five unemployed people for every job opening, roughly twice the ratio at the worst moments of the last recession, which, recall, was considered a jobless recovery.

The shortfall in job openings relative to the last recovery is apparent in nearly every industry, indicating that the problem is across the economy rather than rooted in particular sectors. Nor do the unemployed appear "unqualified." Unemployment over the recession has doubled for every educational grouping, including college graduates whose unemployment is far higher than anytime since 1979 (the earliest year for monthly unemployment data).

Moreover, the percentage of unemployed who have been out of work for at least six months is the same across all education groups. In other words, unemployed college graduates bear the same risk of long-term unemployment as those with high school degrees. In sum, we do not have unemployment because of weak skills or poor schools: Rather, we have a serious shortfall in demand due to a loss of housing and stock wealth and recession-caused income losses compounded by the de-leveraging of our household and business sectors.

Is There a Looming Shortage of College Graduates?

There has been a drive to greatly increase college graduation rates, led by the Obama administration, the Gates Foundation, and others. A recent paper by Massachusetts Institute of Technology economist David Autor for the Hamilton Project and the Center for American Progress contends that "rising demand for highly educated workers, combined with lagging supply, is contributing to higher levels of earnings inequality. ... Workers that do not obtain postsecondary education face a contracting set of job opportunities." Autor's sole policy recommendations for rising inequality boil down to "an increased supply of college graduates should eventually help to drive down the college wage premium and limit the rise in inequality," and "the United States should foster improvements in K-12 education so that more people will be prepared to go on to higher education."

There is certainly a strong equity case for giving every student the opportunity to complete college and especially for assisting racial and ethnic minorities to achieve upward mobility. This would also assist long-term growth and provide a healthier, more informed citizenry. However, greatly boosting college graduation above its expected growth rate will not materially address either past or future inequalities. It will exacerbate the already deteriorating pay and benefits facing young college graduates and lead to falling wages among all college graduates, especially men.

Despite frequent claims, it is simply untrue that we have seen a three-decades-long radical increase in employers' demand for four-year college graduates. The widespread (even before the recession) utilization of college students and graduates working as unpaid (many unlawfully so) "interns" is evidence enough -- if employers desperately needed these workers, they would pay them.

In fact, the trends of the last 10 years contradict this story. The wages and benefits received by young college graduates fell over the 2000-2007 business cycle and in this recession. Moreover, the wages of all college graduates have been flat over the last 10 years, with those for men having markedly declined. This should not be surprising as the relative demand for college graduates, according to Harvard's Claudia Goldin and Larry Katz, grew more slowly in the 2000s than in any postwar decade, following relatively slow growth in the 1990s. A major increase in the supply of college graduates would further erode the wages and benefits new college graduates obtain and drive down the wages of all college graduates, especially among men.

The college premium has barely budged in 10 years. Yet income inequality among households has soared since 2001, and the wage gap between high- and middle-wage workers has grown strongly as well. Something that's not growing -- the college premium -- cannot explain growing inequality. Having more college graduates will leave untouched the income inequality driven by the outsized income growth (from salaries and capital gains) claimed by the upper 1 percent and the upper 0.1 percent. Wage gaps are primarily driven by increased inequalities among workers with similar educations (among college graduates, for example) rather than by differences across education groups.

What is the Role of Education in Prosperity?

It's certainly true that America needs better-educated citizens beginning with pre-K and public education, stronger community colleges, more affordable paths to higher education, and comprehensive training policies that increase skills and lead to better-paid jobs. But none of these education policies are the primary cure either for the widening income inequality of the past three decades or the current crisis of joblessness. The income distribution was much more equal during the postwar boom when most young workers had only a high school diploma -- because we had strong institutions of worker representation and wage-setting as well as tax and regulatory policies that constrained the greed at the top.

More education and training are necessary to obtain the long-term growth we desire and to provide equal access to job opportunities for the entire population and workforce. Individuals deciding whether to pursue more education and training would be wise to enhance their human capital, as it will place them in a better position as wage earners and citizens.

That being said, the challenge we face with persistent unemployment exceeding 9 percent is not better education and training for those currently unemployed. Rather, we need more jobs.

The huge increase in wage and income inequality over the last 30 years was not caused by a skills deficit. Rather, workers face a "wage deficit." The key challenge is to provide good jobs and re-establish the basis for wages and compensation to grow in tandem with productivity, as they did before 1979.

We do need more investment in education at all levels, so that the children of the working class have a better opportunity to compete for good jobs. We also need what Europeans call an active labor-market policy, so that the money we invest in training is directly connected to re-employment at good wages, rather than operating in a vacuum.

The nation's productivity increased by 80 percent from 1979 to 2009, and good productivity growth can be expected in the future. It is not education gaps that have caused nearly all of those gains to be captured by the top but rather economic policies that redistributed economic and political power.

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