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Research desk investigates: How does college explain unemployment numbers, but not inequality?

By Dylan Matthews

jkrantz1 asks:

[Ezra] had a post yesterday, "The benefits of a college degree in one graph", saying that the recession isn't being felt among the college educated. But the anecdotal stories of the PhD's who can't find jobs in this climate aside, economists documenting the growing income gap (Saez, Krugman) have shown that the College-High School wage ratio doesn't do much to explain inequality.

So how would you reconcile the fact that, while rising numbers of college graduates can't explain systemic income inequality, it can create a divide between those who feel the recession and those who don't.

The chart Ezra put up shows that college graduates have an unemployment rate of 4.5 percent, far below the 10.1 percent rate for high school graduates, or the 13.8 percent rate for high school dropouts. This seems to suggest that educational attainment contributes to economic inequality.

To be sure, it does. Indeed, some economists, such as Greg Mankiw, Edward Lazear and Daron Acemoglu, credit the increasing wage premium that comes with greater education with most of the increase in economic inequality in recent decades. However, this ignores that income inequality has risen not just because upper -and upper-middle-class people have pulled further ahead, but because the super-rich have pulled ahead of everybody. Here's the median income of each level of educational attainment in 2007:

median_household_income_by_educational_attainment.png

Now, $100,000, the highest figure here, is a very high annual income, but according to data (Excel file) from Berkeley economist Emmanuel Saez, it is not enough to reach the top 10 percent of earners. It's within that 10 percent, and specifically its higher reaches, that income differentials become really dramatic:

income_share_by_earner_group.png

The top 5 percent make over $161,328, the top 1 percent over $414,225, the top 0.5 percent over $656,367, the top 0.1 percent over $2,131,875, and the top 0.01 percent over $11,917,298. While these earners are more likely to have advanced degrees than the average head of household, an increased number of professional degree holders making an average of $100,000 cannot explain these kinds of income concentrations. When the differentials are this large between people who are all very highly educated, some other factor is needed.

By Dylan Matthews  |  August 12, 2010; 3:54 PM ET
Categories:  Inequality  
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Comments

If you look at the richest people in America...Warren Buffet, the Waltons, Larry Ellison, Gates, etc., I don't think you'll find many Ph.D.'s. Although some have grad school degrees, there are more than a few college drop outs there.

Throw in top athletes (Arod, LeBron), entertainers like Oprah, Rush, Britney Spears, Tom Cruise, etc. and you'll also probably find that not many of them have any grad school degrees. Heck many don't have more than a HS diploma.

Once you get into the land of people worth tens of millions, hundreds of millions, billions, the relationship between education and income totally breaks down. It is also these people that drive the inequality measures.

Posted by: nylund | August 12, 2010 5:05 PM | Report abuse

What accounts for the disparity? Well, there's tax cuts that favor the kinds of income that very high income groups have, like the 15% preference for dividends and capital gains. Then there's the factor of inheritance, since about 75% of inhertiance misses being taxed by one way or another. It takes money to make money, and the rich have far more money to start with, and much greater sources of more money, like no-interest Fed loans, inheritance etc and they have greater access to leverage (my brokerage account doesn't allow 30-1 leverage), and with all these advantages they are able to make ever more money.

Occasionally one of them will overstep and lose a bundle or go to prison, but by and large money begets more money.

That's why we need a top rate of 45% on incomes over $1 million and 50% on ioncvpmes over $10 million. Make it so higher compensation doesn't really pay.

Posted by: Mimikatz | August 12, 2010 5:07 PM | Report abuse

Does the normal distribution of intelligence and ability play any role; that is, is there some point at which the nature of the human animal causes some to be more successful than others?

The presence of a degree is insufficient to "prove" capacity: handing out increasing numbers of higher degrees does nothing more than lessen the value of the lower degrees. In many instances, a degree is little more than a certificate of conformity, available for purchase at market price... and this isn't new: today, degrees are granted to Keynesians just as degrees were for more than six centuries -- even after the works of Copernicus and the death of Galileo -- granted to those who adhered to Ptolemy's theories of epicycles, deferents, and equants.

Posted by: rmgregory | August 12, 2010 5:20 PM | Report abuse

Data, and amybe a graph showing where the income does come from would be helpful to get to the core of rising inequality. I'm sure that would show that for the top 10 a much higher share of their income than the average comes from capital investments. GThe whole problem in the US seems to be that income from hard work has been continuosly disadvantaged over the last decades. The distorted tax laws and the weakening of the unions certainly played a role in that. And I guess everybody with some knowledge about economy knows that, but many simply prefer to ignore the stinking elephant in the room!

Prolly because it's the offspring of one of the major parties. That's what all the dishonest talk about "post-partisanship" is really about, to make up an excuse for the dishonest refusal to discuss such consequences of the long running class warfare by the right wingers. Like a bad parody of Robin Hood, they have been stelaing from the poor and middle class and gave to the rich. And so far, they got away with that. When will the people finally wake up and recognize this ongoing crime wave?

Posted by: Gray62 | August 13, 2010 7:31 AM | Report abuse

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