Wednesday, May 16, 2007

In the beginning there was complete equality, and the food sucked 

The return to education is rising, says Gary Becker and Kevin Murphy (temp link, permalink for Chronicle of Higher Ed subscribers; h/t: loyal reader jw.) And it's not only driving further income inequality, but that's a good thing, they say.

In China, for instance, economic development since the early 1980s has pushed income levels between households in the city and those in the countryside further apart. Urban residents, on average, now earn more than three times as much as rural ones. Despite the widening income gap, write the authors, "rapid economic development dramatically improved the lives of China's poor." As they note, the number of Chinese living in poverty dropped to 42 million in 1998, down from 260 million in 1978.

In the United States, income inequality seems to be signaling the rising payoff of a college education, the authors say. "The labor market," they write, "is placing a greater emphasis on education, dispensing rapidly rising rewards to those who stay in school the longest."

In 1980, they note, college graduates earned approximately 30 percent more than people who completed high school only. Today the difference is about 70 percent. The wage premium for a graduate degree, meanwhile, has jumped from 50 percent in 1980 to more than 100 percent today.

"The potential to improve one's labor-market prospects through higher education is greater now than at any time in the recent past, and this potential extends across gender and racial lines," they write.

Thus, the authors conclude, "the forces raising earnings inequality in the U.S. are beneficial to the extent that they reflect higher returns to investments in education and other human capital." Instead of lamenting the earnings gap, they add, or trying to correct it through reforms of the tax code, policy makers should focus on increasing the number of high-school graduates who go on to complete a college education.

The full article is online.

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