The Skills Gap

THE SKILLS GAP….Over the past couple of decades the wage premium for getting a college degree has gone up dramatically. In 1973 a typical college grad earned 30% more than a high school graduate. Today a college grad earns something like 90% more.

Standard economic theory predicts that this should lead to way more people getting college degrees, but that hasn’t happened. Altonji, Bharadwaj and Lange report that, when various socioeconomic factors are held constant, “the supply response to the increase in skill premia between cohorts was small: about 1% on average and about 1.5% at the median.” In other words, kids aren’t bothering to increase their skills very much even though the reward for doing so has skyrocketed.

Why? Brad DeLong proposes that part of the answer may be the surging cost of college, which not only makes the return on a bachelor’s degree lower than it would be otherwise, but probably makes it seem even lower than it really is to teenagers with short time horizons. He’s also got some other ideas that he muses about here.

But I want to toss out another possibility that’s been tickling my brain for a while. On the right is an EPI chart that shows declining wages for college grads over the past seven years. Ezra Klein comments:

As an economist told me a year or two back, “there’s never been a worse time to be a college graduate. But there’s never been a worse time not to be a college graduate.” Your wages may be higher than those of less educated cohorts, but they’re stagnant nevertheless.

Right. And maybe that’s the problem. When I say that the premium for getting a college degree used to be 30% and now it’s 90%, what do I mean? One possibility is something like this:

  • 1973: high school grad makes $42K, college grad makes $55K.

  • 2006: high school grad makes $42K, college grad makes $80K.

This probably would motivate more kids to get college degrees. But that’s not what actually happened. Here’s what actually happened for male workers (all figures adjusted for inflation):

  • 1973: high school grad makes $42K, college grad makes $55K.

  • 2006: high school grad makes $31K, college grad makes $61K.

The skill premium hasn’t gone up because a college degree is way more lucrative than in the past. In fact, it’s only slightly more lucrative over the long term and completely stagnant among recent grads. Rather, the skill premium has gone up because the value of a high school degree has cratered.

So here’s my thought: even though the two scenarios above are (roughly) economically equivalent, they might not be psychically equivalent. If the value of a college degree had gone way up, that really might prompt more kids on the margin to study harder and go to college. Not only would that higher value be fairly obvious since it would get a lot of attention, but the prospect of doing better is highly motivating. But does the declining value of a high school degee motivate them in the same way? I doubt it, even though mathematically the effect is the same. For starters, many teenagers may not really understand the hard reality of the trend in non-college wages, and in any case a slow but steady decline simply doesn’t motivate people the same way as dangling a reward in front of them does. Instead of making them try harder, it tends to make them feel helpless and angry.

Am I explaining myself adequately here? I’m not sure. But it seems to me that there are lots of cases where real-life behavioral responses depend not merely on monetary differences, but on the direction and reason for those differences. Perhaps if you want more kids to go to college, you need to reward them for going to college, not merely punish them for not going.