Income Inequality and the Earnings Gap Between Educated and Non-Educated Workers

income inequality education

Income inequality exists in every society or country due to the differences in education, gender, race, region, and/or other factors. It may impact a society in several different areas, including the economy, education, crime, and health and life expectancy.

Education is arguably one of the primary factors that cause income inequality. Recent studies show that the earnings gap between workers with a Bachelor’s or more advanced degree and workers with a high school diploma has been widening. And this widening of income inequality is said to negatively affect higher education. As those non-educated workers become poorer, they have difficulty sending their children to college.

Some economists claim that if our society can produce more college-graduating workers, income inequality between educated workers and non-educated workers may be reduced. How can it be possible?

How Does Income Inequality Affect the Economy?

According to the Organisation for Economic Co-operation and Development (OECD) report, income inequality has been increasing in most OECD countries during the past 30 years (OECD, 2014). The Gini coefficient, a measure of income inequality (0 means perfect income equality and 1 means perfect income inequality), was 0.29 in OECD countries in the mid-1980s but went up to 0.32 in 2011/2012 (OECD, 2014). The Gini coefficient for the United States was 0.403 in 1980 and 0.468 in 2011, which were higher than other OECD countries. The OECD analysis shows that income inequality has “a negative and statistically significant impact on medium-term growth” (2014, p. 2).

Several economists claim that income inequality hurts economic growth, economic and financial stability, and productivity and economic efficiency (Fletcher, 2014; Sherman, 2014). Joseph Stiglitz, a Nobel Prize winning economist, states, “We are paying a high price for the inequality that is increasingly scarring our economy — lower productivity, lower efficiency, lower growth” (2012, p. 177).

Why Has the Income Inequality Gap Between Educated and Non-Educated Workers Been Widening?

The income or earnings inequality gap between the Bachelor’s or higher degree workers and the non-degree workers has been widening since the late 1970s. This discrepancy can be explained by the basic supply-demand relationship. Some economists claim that as society has advanced in technology, firms’ demand for more educated and skilled workers has increased whereas the supply of more educated workers has stagnated or even reduced. Thus, there is a shortage of educated workers and the earnings gap between educated and non-educated workers has been widening.

Anthony Carnevale and Stephen Rose state that the United States has been under-producing college-going or graduating workers since 1980 (2011, p. 3). Thus, the supply of college-graduating workers has been decreasing or stagnating whereas the demand for college-graduating workers has been increasing.

However, there are some other economists who state that income inequality has little or nothing to do with education. Elise Gould argues that even Bachelor’s and advanced-degree workers are not in high demand (2015).

As Gould and Krugman argue, it may be true that the college-degree and more advanced-degree workers’ real wages after adjusting for inflation have not increased or have even decreased since 2007. However, it is also true that their real wage decreases were smaller than the real wage decreases of less-than-college degree workers. It means that the earnings gap between the educated workers and non-educated workers has been still widening. In addition, studies show that educated workers have been laid off or unemployed less than non-educated workers.

Can More or Better Education Reduce Income Inequality?

As we see clearly, the earnings gap between Bachelor’s or higher degree workers and high school diploma workers has been widening since the late 1970s. Some economists claim that if our society produces more college-graduating workers, income inequality can be reduced. According to Carnevale and Rose, the income inequality would decline if 20 million postsecondary-educated workers were added to the workforce (p. 8).

When there is an increase in college-educated workers, the supply curve of this group will shift to the right (more college-educated workers are supplied) and the supply curve of the high school diploma workers will shift to the left (fewer non-educated workers are supplied). Then, the earnings gap between them may be reduced.

Hershbein, Kearney, and Summers simulated the effects of increasing the college attainment of working-age men. Their simulation results show a positive effect on average earnings and chances of being employed but no significant effect on overall earnings inequality (2015). Yet, their results demonstrate that an increase in educational attainment will reduce inequality in the bottom half of the earnings distribution (2015).

Conclusion

Income inequality has been a hot issue in many countries whether they are developed or developing countries. Our discussion presents that education also has been contributing to income inequality and that the gap has been widening between the educated and non-educated workers as society has advanced in technology and thus employers want to hire more educated workers. Yet, the supply of educated workers has not been meeting the demand for them.

Income inequality that has been caused by differences in education may be reduced when more college-degree or more advanced-degree workers can be supplied through traditional and online higher education institutions. One issue still remains: how can our society reduce education expenses including tuition to produce more college-degree workers?

 

Written by Kunsoo Paul Choi, PhD, Core Faculty in the Forbes School of Business® at Ashford University

References

Carnevale, A. P., & Rose, S. J. (2011). “The Uneducated American.” Georgetown University Center on Education and the Workforce.
Retrieved from http://files.eric.ed.gov/fulltext/ED524302.pdf

Fletcher, M. A. (2014, January 24). “Income Inequality Hurts Economic Growth, Researchers Say.” The Washington Post.
Retrieved from https://www.washingtonpost.com/business/economy/income-inequality-hurts-economic-growth-researchers-say/2014/01/24/cb6e02a0-83b0-11e3-9dd4-e7278db80d86_story.html

Gould, E. (2015, February 20). “Even the Most Educated Workers Have Declining Wages.” Economic Policy Institute.
Retrieved from http://www.epi.org/publication/even-the-most-educated-workers-have-declining-wages/

Hershbein, B., Kearney, M. S., & Summers, L. H. (2015, March 30). “Increasing Education: What It Will and Will NOT Do for Earnings and Earnings Inequality,” The Hamilton Project.
Retrieved from http://www.hamiltonproject.org/assets/legacy/files/downloads_and_links/impact_of
_edu_earnings_inequality_hershbein_kearney_summers.pdf

Hill, Catherine B. (2015, June 10). “Income Inequality and Higher Education.” ACE (American Council on Education).
Retrieved from https://www.acenet.edu/the-presidency/columns-and-features/Pages/Income-Inequality-and-Higher-Education.aspx

Kenworthy, L. (2015, September). “Is Income Inequality Harmful?” The Good Society. Retrieved from https://lanekenworthy.net/is-income-inequality-harmful/

Krugman (2015, February 23). “Knowledge Isn’t Power.” The New York Times.
Retrieved from http://www.nytimes.com/2015/02/23/opinion/paul-krugman-knowledge-isnt-power.html?_r=0

OECD (2014, December). “Focus on Inequality and Growth.”
Retrieved from https://www.oecd.org/social/Focus-Inequality-and-Growth-2014.pdf

Rothwell, J. (2015, March 3). “Is Income Inequality Really Unrelated to Education?” The Avenue/Rethinking Metropolitan America.
Retrieved from http://www.brookings.edu/blogs/the-avenue/posts/2015/03/03-income-inequality-education-rothwell

Sherman, E. (2014, Dec 9). “Income Inequality Hurts Economic Growth.” Forbes. Retrieved from http://www.forbes.com/sites/eriksherman/2014/12/09/income-inequality-hurts-economic-growth/#8ae47ed61d63

Stiglitz, J. E. (2012). The Price of Inequality. W.W. Norton & Company.

Strauss, S. (2012, January 2). “The Connection between Education, Income Inequality, and Unemployment.” Huffpost Business.
Retrieved from http://www.huffingtonpost.com/steven-strauss/the-connection-between-ed_b_1066401.html

 

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