Commentary | Education

Lessons—Supply, Demand, Wages and Myth

These pieces originally appeared as a weekly column entitled “Lessons” in The New York Times between 1999 and 2003.


Supply, Demand, Wages and Myth

By Richard Rothstein

The wage premium for a college degree has soared. In 1979, a college graduate’s first job typically paid 35 percent more than a high school graduate’s. Twenty years later, in 1999, the premium had grown to 80 percent.

The most common explanation is that demand for educated workers is outstripping supply. The President’s Council of Economic Advisers says the premium is “striking evidence” of a need for more skilled workers.

But the conclusion is probably unwarranted. That the relative earnings of college graduates are climbing does not mean that the demand for these workers must also be climbing.

The ratio of college graduates’ wages to high school graduates’ wages can also increase when the pay of high school graduates declines. Indeed, the college wage premium can go up even if salaries of college graduates are falling, provided those of high school graduates fall even faster.

Mostly, that’s what has happened. The growing premium results more from the declining pay of high school graduates than from salary trends for college graduates.

Data from The State of Working America, a compendium issued once every two years by the Economic Policy Institute, show that the average entry wage for college graduates in 1999, adjusted for inflation, was only 8 percent higher than in 1979. This small growth was too new to be called a trend: in 1997, wages for new college graduates were actually 2 percent lower than in 1979.

Meanwhile, beginning wages for high school graduates fell even more. In 1997, they were only 76 percent of the 1979 level. By 1999, they had rebounded only to 81 percent.

A look at the causes of high school graduates’ wage declines shows that relative demand for workers with different levels of education is mostly irrelevant.

Perhaps as much as a third of the growth in the wage disparity between high school and college graduates has been caused by a falling minimum wage and a decline in unionization.

The inflation-adjusted value of the minimum wage has fallen markedly, and many women with only a high school diploma have jobs paying close to this minimum. In 1979, the legal minimum was $6.53 (in 1999 dollars); today it is only $5.15.

Men with high school diplomas (and no further education) are more typically unionized than are women and are therefore more affected by a decline in union strength than by a falling minimum wage. Union workers earn about 15 percent more than similar nonunion workers. In 1997, only 21 percent of male workers with no education beyond high school were union members, down from 38 percent in 1978.

Other economic changes have also played a role in the growth of the wage disparity. For example, high school graduates were more likely to work in manufacturing 20 years ago than they are now, and more likely to work in service industries today. Service industry wages are generally lower than manufacturing wages for similarly skilled workers with only a high school education.

A small part of the growth in the college wage premium does result from a recent increase in college graduates’ earnings, but even this does not reflect the conventional image: supply of college-educated workers outstripped by technology-driven demand. Most of the recent increase in wages of college graduates stems from soaring compensation for business managers and sales workers (like stockbrokers), not from the much smaller (or nonexistent) growth in wages for scientists, engineers or other professionals.

In 1978, the chief executive officers of major American corporations earned about 29 times the pay of average workers in their companies. By 1999, this multiple had grown to 107 times. Managerial employees have also benefited from salary increases that outpace those typically received by college graduates as a whole. These compensation trends for managers and investment professionals do not result from shortages of college graduates to enter these fields. More likely, they stem from an attitudinal change that makes great inequities more acceptable in American society.

Certainly the economy is slowly shifting to more jobs requiring college education. But this shift is no more rapid than the growth in the number of college graduates. In 1979, about 18 percent of young people got bachelor’s degrees. By 1999, this had grown to about 27 percent. Demand for graduates is probably not growing faster than this, so supply and demand factors cannot explain much, if any, of the growing college wage premium.

As more young people conclude that they should go to college, the wage premium will narrow. But the cause will be a growing oversupply of college graduates, leading to falling wages in their fields.

Of course, more Americans should attend and complete college; education has value beyond its labor market consequences. But we err if we hope to rely on education, and education alone, to solve growing problems of economic inequality.

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