204 NEW ECONOMY

Education isn't JOHN SCHMITT

Labour Economist,

Washington and reauthor of The State of Working

Widening earnings gaps are as much the result of other policies

merica, 799697

ince the late 1980s -when some conser- vative economists and politicians still

' disputed the idea -everyone has agreed that inequality in the United States and the United Kingdom has risen dramatically since the end of the 1970s. OECD data indicate, for example, that in the United States the ratio of the earnings of high-wage male workers (those at the 90th percentile) to low-wage male work- ers (those at the 10th Dercen-

Secretary Robert Reich, have long been cham- pions of education and training. In the United Kingdom, Conservative governments have conducted several well-publicised overhauls of the national youth training system (YT, nee YTS, nee YOP) and recently made the econ- omy-education link explicit with the creation of the Department of Education and Employ- ment. Meanwhile New Labour offers ex-

panded educational and tile) increased from 3.2 to 4.4 between 1979 and 1995. The same ratio in the United Kingdom grew from 2.5 to 3.3 over the same period. Wage inequality among women in both countries also grew, with the high-to- low wage ratio increasing from 3.1 to 4.0 in the United

"or British men

experience combined were responsible for just one-third of the increase in

overa 11 wage inequality."

education

States and from 2.3 to 3.1 in the United Kingdom. This has been the main contributor to the recent, palpable growth in income inequality.

A consensus has emerged in both major political parties in both countries that more education and training are the principal means for closing the widening wage gap. In the United States, George Bush declared him- self the 'Education President'. Bill Clinton and his chief spokesperson on inequality, Labour

training opportunities as the central solution to the coun- try's economic woes. At the Party's conference in Octo- ber, Tony Blair articulated his three priorities as 'education, education and education'.

Faith healing Faith in the healing powers of education and training

grows from two beliefs. The first is that the inequality experienced since the late 1970s reflects a widening gap between those better- educated, better-trained workers who are have the skills to thrive in a technologically- complex, global economy and those who don't. This view focuses principally on the financial benefit to the individual of educa- tion and training. The second belief is that raising the general skill level of the workforce

1070-3535196/040204+ 05 $1 2.0010 0 1995 THE DRVDEN PRESS

EDUCATION ISN'T EVERYTHING 205

will boost lagging productivity growth, thus raising living standards. This view embraces the broader economic benefits of a skilled labour market.

Both propositions contain elements of the truth, but both are also fundamentally flawed representations of the experience of the last 20 years. Rising wage inequality does not stem primarily from workers' inability to keep pace with new demands for skills, and the ability of education and training to boost pro- ductivity and general living standards has been greatly oversold.

A gap between or a gap within The financial benefits of a good education soared in the US and the UK in the 198Os, contributing to the belief that education 'dif- ferentials' were primarily responsible for ris- ing inequality. For the same experience, race, region, marital status and so on, the differ- ence in hourly earnings between male, uni- versity-educated workers in the US and similar workers without a university degree, for example, grew from 31 per cent in 1979 to 52 per cent in 1989. In Britain, the earnings differential between a male university gradu- ate and an identical worker with no educa- tional qualifications increased from 72 per cent to 93 per cent between 1980 and 1988. The story was the same for women.

These increases, however, represent only a portion of the growth in overall inequality. For US men, the effects of education and work-experience differentials together ac- counted for only 35 per cent of the rise in inequality between 1973 and 1995. Even in the 1980s' when they were most sigruficant, edu- cation and experience combined were respon- sible for only 60 per cent of the increase. For US women, the figure was only 43 per cent md for British men education and experience combined were responsible for just one-third of the increase in overall wage inequality. (No comparable analysis exists for British women.)

Most of the increase in inequality since the

late-l970s, then, has had nothing to do with increases in private financial benefits from education. In fact, inequality has actually in- creased more among the 'haves' as a group and the 'have nots' as a group than it has between the two. This is a pattern evident in every analysis of recent wage inequality. Even for workers of the same education and expe- rience, inequality has grown more within oc- cupations (among non-manual workers, for example) than between workers in different occupations, more within industry groups (manufacturing and services, for example) than between those groups; and more within education groups than between them.

The causes remain a mystery, but since the inequality is occurring within all these groups they cannot be related to a lack of formal edu- cation. Education can correct the share of in- equality attributable to a growing gap between the more and the less well-educated, but it cannot address the more important increase in inequality - probably about two-thirds of the total - that has occurred within these groups.

What skills shortage? Much of the public discussion of wage in- equality takes the growth in education differ- entials as straightforward evidence that the US and UK economies face skill shortages. But this is not necessarily the case. In the United States, for example, the long-term erosion in the real value of the minimum wage and the steep decline in the size and influence of the unions disproportionately hurt the wages of high-school educated workers. The United Kingdom saw similar developments - the abolition of wages coun- cils and a sharp drop in union membership and clout - which undercut the wage-growth potential of workers without educational qualifications. These institutional changes widened education differentials in both countries without any change in the underly- ing demand for skilled labour.

A closer look at wage and employment

206 NEW ECONOMY

trends over the last 15-20 years supports the idea that even the share of inequality that is due to growing education differentials has lit- tle to do with a greatly expanded demand for skilled workers. If heightened demand for more-educated workers were responsible for growing inequality, we would reasonably ex- pect the inflation-adjusted wages of more- skilled workers to have increased. As we have seen, the wages of more-educated workers did increase substantially relative to less-edu- cated workers. In the United States, however, inflation-adjusted wages for male workers with a university degree were virtually un- changed between 1979 and 1995. Real wages for university-educated women did increase about 20 per cent over the period, but by 1995 university-educated women, on average, still earned only 76 per cent of their male counter- parts. It is not, then, that the wages of highly- educated workers went through the roof, but rather that the wages of less-well-educated workers fell through the floor.

If technology were spurring demand for computer-literate workers, we would also ex- pect the wages of re- cent university graduates to have risen more rapidly than the wages for older graduates, many of whom have little knowl- edge of, or experi- ence with, comput- ers. In fact, since 1979 the wages for male US university graduates with one to five years of la- bour market experi- ence have fallen 11 per cent. For compa-

pattern. Wages for male and female workers at all educational levels increased throughout the 1980s, with larger increases at the top and smaller increases at the bottom. In the 1990s, it appears, wages for some workers have stag- nated while those higher up have continued to grow, especially at the top. The UK wage data at face value, then, are more supportive of skills shortages. It is also posslble, however, that even much-weakened British labor mar- ket institutions protect mid- and low-wage workers more effectively than US institutions.

Some economists have called a great deal of attention to evidence that the share in manufacturing employment of nonproduc- tion workers in the United States and non- manual workers in the United Kingdom grew during the 1980s. If the wages of these more- skilled workers increased yet firms still em- ployed more of them, the thinking goes, the underlying demand for moreskilled workers must have increased.

As the chart illustrates, this misses most of the story. Curiously, in both countries, the share of non-production or non-manual

workers shot up be- tween 1979 and 1982 (suggesting an abrupt, international, macroeconomic effect rather than ongoing t ec hn ologica 1 im- provement). In the US, the non-produc- tion share was then flat through the end of the 1980s and actually fell in the 1990s. In the UK, the most interest- ing feature of the graph is not the in- crease in the share of nonmanual workers

rable US women, wages grew about 11 per cent between 1979 and 1989, only to fall eight per cent between 1989 and 1995.

The wage data for the UK show a different

through the 1980% but rather the sharp decel- eration, relative to the earlier postwar period, in the growth of the nonmanual share.

Both economies suffered white collar re-

EDUCATION ISN'T EVERYTHING 207

cessions in the early 1990s. Record levels of corporate downsizing persisted in the US through the early years of the current recov- ery. These developments suggest that firms may now be correcting for excessive hiring of better-educated, white-collar workers in the 1980s. In any event, the evident deceleration (and in the United States in the 19%, the actual decline) casts further doubt on the view that accelerated technological progress ex- plains the rise in education and experience differentials over the last 15-20 years.

Flat wages for the best-educated US work- ers, falling wages for recent US university graduates, and a marked deceleration in the growth of the share of more-skilled occupa- tions in manufacturing employment all argue against the idea that skill shortages lie at the heart of the economic inequality confronting the US and the UK.

A more likely explanation is the wholesale changes in direct and indirect labour market institutions that have taken place in both countries -from minimum wages and unions to privatisation and product market deregu- lation. Institutions and arrangements that have disproportionately protected the wages of less-well-educated, low- and middle-wage workers, have been weakened, leading to the increased education differentials.

Education and productivity Even if education is a poor tool for address- ing wage inequality, surely raising the gen- eral levels of skills in the labour force would help to increase productivity and therefore the national standard of living? Formal edu- cation and training unquestionably play a central role in the determination of national productivity, but the relationship is not me- chanical. No guarantees exist that increasing a country's level of educational attaixunent will automatically translate into improved macroeconomic outcomes. As University of Pennsylvania economist Mark Rosenzweig has observed: "many countries with rela- tively high levels of schooling compared to

their level of development in the 1960s' such as the Philippines, Sri Lanka, Argentina, Costa Rica, Cuba, and Uruguay, did not sub- sequently achieve high growth rates over the next twenty-five years".

The recent experience of the United States and the United Kingdom confirms the slip- pery link between education and national economic performance. The average years of schooling among workers in the US private sector, for example, grew from 11.6 years in 1973 to 13.3 years in 1995, 'high school drop- outs' fell from 29 per cent to 11 per cent of the US workforce and the share of workers with a university degree doubled from just over 12 per cent to 25 per cent. In the UK, the share of males with no educational qualifications dropped from over half the male working population in the mid-1970s to less than one- third by the late-1980s. University graduates made up less than five per cent of the male British labour force in the mid-1970s' but the share more almost tripled by the mid-1990s.

These improvements in educational attain- ment were truly astounding by historical standards. Productivity growth rates, never- theless, were much higher in both countries prior to the boom in educational attainment. Wage inequality was also lower, as was un- employment.

The limitations of education Even if growth in the wage gap between educational 'haves' and 'have-nots' is not the primary cause of rising overall wage inequal- ity, wouldn't improving overall educational attainment help? Undoubtedly it would. This is particularly true with respect to the efforts of individuals and families struggling to make ends meet in an increasingly hostile economy. For them, educational opportuni- ties represent a key avenue for economic ad- vancement. At a broader level, however, the benefits of any reasonable programme would be likely to be smaller than is com- monly assumed, and the costs would cer- tainly be enormous.

208 NEW ECONOMY

To understand the limited efficacy of a purely education-based solution to current wage problems, it is important to understand the scale of increases in educational ’upgrad- ing’ in the United States and the United King- dom since just the mid-1970s. For demo- graphic reasons, a repeat performance is highly unlikely. Most of the improvement oc- cured simply because the large, well-edu- cated baby-boom generation replaced their parent’s smaller, less-well-educated genera- tion in the workforce. With more of the labour force already fairly well-educated and with a relatively smaller crop of young, better-edu- cated workers, progress from now on will probably be much slower than in the 1960-90 period.

The costs of the educational solution would also be staggering. This is not a reason to oppose such spending, simply a warning that proposals that involve little or no change in government spending are likely to have little or no impact on national inequality. Uni- versity of Chicago economist James Heckman has estimated that the additional education and training in the United States required just to close the breach opened in the college-high school differential during the 1980s would re- quire additional expenditures of $170 billion per year. This is far beyond the wildest dreams of those who offer education and training as the solution to our countries’ wage problems. Such spending, moreover, would only eliminate the minor portion of the rise in wage inequality that is related to skill differ- entials.

Conclusion The consensus on the need for more educa- tion and training has too often been used to blame the victims of the economic upheavals of the last 20 years.

According to the education-and-training school, those who have lost ground - the vast majority in both countries - have simply paid the price for their inadequate preparation. Such a view, however, ignores the drastic erosion

of the institutions that traditionally have worked to defend living standards. In the United States, the fall in the real value of the minimum wage, the decline in union mem- bership, the deregulation of major industries, and the opening-up of domestic markets to foreign competition have undermined the bargaining power of most workers, union and nonunion, white collar and blue collar.

In Britain, the abolition of wages councils, the steep decline in trade union repre- sentation, extensive privatisation, product market deregulation, and deep cuts in social income and insurance programmes have had a similar effect. More education and training will do little to address these causes of in- equality. Efforts to reduce inequality should concentrate, instead, on repairing (or replac- ing) the labour market institutions that have traditionally defended the standard of living of the bulk of the population.

Education policy can play a role - particu- larly if it focuses on fighting the obvious in- equality in the access to education and training opportunities that has concentrated thebenefits of education in the hands of those who already enjoy a better-than-average standard of living. We should, however, avoid saddling education with the impossible task of solving deep-seated distributional problems.

In an important sense, we have already walked a long way down the education path. The results have been less than encouraging. In the midst of educational upgrading on a scale that we could never hope to replicate, wage inequality rocketed in the US and the UK; unemployment soared in the UK; and productivity growth decelerated precipi- tously, especially in the US. Things would un- doubtedly have been worse without the edu- cational progress that did take place, but the lesson is clear: we are up against forces that will not yield to greater educational attain- ment alone *