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YOU DECIDE: Will education always pay off?

June 26, 2008

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

When I was a youngster, my father constantly told me to "get an education." My father came from a generation when education wasn't as important as it is today. He left school after 10th grade, went to work as a laborer, eventually became a carpenter, and - except for duty during World War II - worked continuously for over 45 years.

By the time I came along, my father knew the world had changed. In the year I was born (1951), high school graduates earned about 20 percent more than those stopping at eighth grade, and college grads earned about a third more than high school grads. But when I was ready for high school, the high school income bump had edged up to 23 percent, while the college pay premium jumped to 40 percent.

And the financial payoff for college has continued to rise. On average, hourly earnings of today's college graduates are 60 percent higher than those of workers stopping their education at high school.

Yet it wasn't always like this. In fact, when my father was growing up in the 1920s and 1930s, the financial benefit from getting more education was falling. The extra hourly earnings of someone with a college degree, compared to a counterpart with a high school diploma, fell by almost one-fourth between 1920 and 1940. Similarly, the extra income paid to a high school graduate compared to a worker with an eighth grade education dropped by one-fifth over the same period.

So what made education's payoff slip in the early 20th century, then rise later? This is the subject of a fabulous new book by economists Claudia Goldin and Lawrence Katz called The Race Between Education and Technology. Goldin and Katz's answer is fairly straightforward: it comes down to those old economic standbys of supply and demand.

Supply, of course, refers to the supply of educated workers, and it is directly linked to the number of people graduating from high school and college. One hundred years ago, it was the supply of high school graduates that was most important. Today, the focus is increasingly on the number of college graduates.

Demand means the desire of employers to hire workers with more education. Goldin and Katz link this demand to technology. As new technology has been developed (the most recent being information technology related to computers), the relative importance of educated workers is elevated in two ways. First, the new technology can substitute for human labor. For example, tractors replaced farmers guiding plows just as robots are today replacing people on the assembly line. These switches decrease the value of workers with strong backs and hands but little formal schooling.

At the same time, the new technology requires trained workers to use and apply it, and so companies want to hire more workers with advanced education and skills.

The impact on earnings is, therefore, a result of the race between the supply of educated workers and the demand for them. Goldin and Katz tell us that in the early 20th century, supply increased more than demand, and so the wage gains for educated workers fell. But in the late 20th and early 21st centuries, the opposite has occurred. Despite substantial increases in the supply of educated workers as more people have gone to college, the demand for educated workers has risen even faster, hence the payoff for more education is now at an all-time high.

But what about the future? Here there are some potentially sobering thoughts. While the demand for educated workers isn't expected to slow down, supply may catch up. However, what is different is that this increased supply may not come from U.S. workers. Indeed, domestic college attendance and graduation rates show some signs of leveling off, while foreign supply is rapidly increasing. Also, by some measures the U.S. high school graduation rate is declining. So while the payoff for education may continue, the question increasingly will be, Who will receive it? How will the race between technology and education be decided, and who will be in the race?

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at June 26, 2008 01:34 PM