3 Rising Skill Premia

Brian Bushnell, Peter Humphreys, and Jin Taek Wang

Introduction

When discussing the topic of intergenerational mobility, an important aspect to consider is the ratio of wages to skills defined as the skill premia. Currently this ratio is rising indicating those with more skills and education will be able to achieve more in life, including wealth, than those without. Today there is an increase in the gap between skill levels and salaries. In order to fully understand what is preventing intergenerational mobility, we must understand why this gap is increasing and the multitude of different factors, including education, that effect it.

One crucial factor we can see is the different ways educational funding is managed in the United States and that effect that management has on the future success of the students. Starting first with primary and secondary schools there is a difference in funding based on the school’s location. This difference is due to the complicated formula dictating how public schools are funded. But, no matter the formula used, the greatest funding comes from the local property tax. This unequal distribution of funding  allows for higher quality teachers, more varied classes and access to more assets and programs to occur at a well funded district located in a wealthier neighborhood than a district located in a poverty stricken neighborhood. The question is does access to these amenities actually make a difference in a child’s future success?

Payne and Biddle (1999) examined school funding, child poverty, and their effects on mathematics achievement. Focusing mainly on child poverty and the effect funding has on schools who deal with poverty, we can see both poverty and lack of school funding have a negative impact on school achievement. This draws the conclusion that equitable funding is unbelievably important, and that the US should take another look at combating child poverty in an attempt to facilitate intergenerational mobility. Despite the fact that many studies concluded that it was all about the home you grew up in and funding of the schools was insignificant when predicting future success, different flaws in their research leads to the hypothesis that while not the “end all be all” equitable school funding can make a difference in a student’s educational achievement.

A study by Chetty and Friedman (2010) looked at local tax financing of public schools and whether or not it perpetuate inequality amongst schools and its students. It’s obvious to see richer communities tend to have better schooling due to their broader tax base and the likelihood of families investing financially and emotionally in primary and secondary education as opposed to poorer communities where parents and individuals are not as invested in their children’s education. One possible solution to this particular issue is either the state of federal government coming in and, while not necessarily closing the gap, provide adequate funding between all school districts. This does bring up the question how much funding is needed to be adequate, but Augenblick and Myers’ (1997) paper looks directly into this issue. Through converting educational standards into a financial formula, the authors discovered several different methods all with their pros and cons when it comes to the relationship between funding and adequacy.

A common theme in all the research mentioned above is, no matter how the school you attend is funded, the household you grow up in has an enormous impact on your success in life. However, there is a way to control this negative effect of growing up in a family of low socioeconomic status that does not put a high value on education. It has been repeatedly shown that early intervention before primary school is key. Multiple studies including Lazar and Darlington (1982) examines the effects of early education programs before primary education has on future success in education. The results of this particular study indicate that early-education programs have long-lasting effects in four areas: school competence, developed abilities, children’s attitudes and values, and impact on the family. Funding for these programs could have vital impacts on future success of their littlest pupils.

Beyond primary and high school, it’s important to compare people who graduate and enter the workforce straight out of high school to GED Graduates and dropouts. According to Heckman and Lafontaine (2006) work any difference between those three groups in wage came purely down to a person’s ability. There was also little to no difference in ability between GED recipients and people who go straight into the workforce from high school. This means obtaining a GED certification, for those who do not obtain a college education, has little or no direct causal effect on wages. But after someone attains a GED, college education now becomes a possibility, so a big question is: can a GED measure success in college? Rose (1999) looks into using ACT and GED scores as indicators of success for postsecondary students. And the short version is it does not, ACT scores can predict success in college but GEDs do not. In conclusion, in most cases, those who drop out and those who directly enter the workforce will eventually fall behind in wages if there is no goal of continuing education in some way. These studies all support the principle that instilling the importance of education in a child at an early age, has a positive impact on intergenerational mobility.

Another important impact to consider is higher education’s effects on the skill premia. Based on its continuing rising cost is higher education still worth it. Conversely is it leading to a wealth gap between those who don’t attend and those who graduate with a 4 year or higher. Avery and Turner (2012) look at student loans and whether college students borrow too much for their education.  Such is the fact that it appears not all high school graduates have the aptitude for success in college based on the high dropout rates. Another conclusion is it may not make financial sense to attend a high cost, private institution to obtain a degree with a low rate of return in wages. If you can make it through college though, it is an absurdly smart investment which will lead to a widening gap between those who do make it through and the rest of the population.

Decade-after-decade the increased college education attainment has established technological change and the demand for specialized skills to fuel this fire. Almeida and Alfonso (1500), concludes that the increased level of demand for these skill sets is established through skill-biased technology change (SBTC) and a drastic increase in global trade.

Increased need for globalized trade revolves back to the United States.  The author concludes skill-driven advancements in the United States pushed for greater international trade with LDC’s– less developed countries.  Acemoglu (199) developed a specified model to develop an understanding of how international trade affects inequality of wages over diverse world economies.  The author utilizes three variables formed in skill premia: trade, technology and internal skill sets. Technology feeds the demand for skills -skill premia is the return to skills- and internal skill sets change in relation to the demand for skills that technology brings about.  This ultimately is an endogenous process that surely bleeds into trade, in turn, affecting globalized trade. It demonstrated an increase in the demand for both the goods of skilled workers and an increase in the skill premium itself.

The findings are consistent with previously cited studies, tending to cement the idea that skill-biased technological change surely occurred -and is still occuring- as international trade steadily increased the value of skill-intensive finalized products.

Acemoglu (201) argues that although skill-biased technology change aided the United States, less developed countries sought out the injection of higher technological change soon after to increase development.  As the price of finalized goods continued to increase in relation to skill-biased technology change, the response from less developed countries was to advance within their education spectrum and to further reduce the cost of comparable finalized products.

Acemoglu (223), concludes that opening up to advanced global trade causes increased inequality– affecting developed and less-developed countries in the process.  The added effect within this model is finding that through SBTC, the adjusted prices of finalized goods may not increase with the increase of global trade. This study finds that to be worrisome as changes in price typically are rudimentary ways for a specified market  to correct.

Almeida and Alfonso (1497) states that the occurrence of SBTC (Skill-Biased Technology Change) and IT (International Trade) have been historically tied to an increased wage distribution within a given state, as it is said that these entities have moved to favor higher-skilled labor.  Almeida and Alfonso (1499) investigate the relevance of SBTC in these economies, namely how it changes education preference within a country and the price effect of such.

Almeida and Alfonso (1497), conclude that a main culprit of skill-biased technology change in relation to wage inequality may be tied to the market-size effect.  The explanation behind the effect rests in the oversaturation of the specified markets. As skill-centric sectors emerge in growth, the supply of those roles will subsequently increase to meet the market size.  This effect may be causation for the decrease in trade-based employment promotions within secondary school and the increased movement for those graduating high school to pursue a college education.

Lloyd-Ellis (67) specifically ties wage inequality resulting from the rate of endogenous technological change to a nation at large, or a community.  Wage inequality will then increase as the rate of new technological inputs increase faster than the knowledge of the inputs is absorbed and put into practice.  This process remains detrimental to specifically under performing communities. As this is occuring, those with a higher skill set will subsequently drive up the cost of technological innovation and high skill wages.  Lloyd-Ellis (67) concludes that wage inequality stemming from rising skill premia is attributed to the growth slow down of the quality of the labor force. Lloyd-Ellis (67) also remarks that to remain responsive to changes relative to rising skill premia, on-the-job training should be readily utilized.  It would allow sets of skills to break free of the public education mold, ultimately transforming students to specifically skilled workers. The ability of the school system would then change relative to cost as it would need to directly compete with specified on-the-job training.

Almeida and Alfonso (1497) concluded that international trade is actively affected through skill-biased technology change.  According to their proposed theory of international change is the secondary variable, “…a decrease in the relative price of imported goods must reduce the return on the factor that is used intensively in their production.”  So a nation would gravitate towards far out producing rival nations in terms of specialized, skill intensive goods.  As this would lead to the causation of increased wages for those workers.

 

Globally, the number of highly educated people is increasing compared to the past. U.S. college enrollment rates have also gradually risen over time, and many people are getting higher education to gain an advantage in the job market. This phenomenon is common pattern all over the world, but especially is true in South Korea and China. Among other things, to talk about Korea’s education fever, Korea has insufficient natural resources, so people considers human capital is the main resource of the country. Since the first National Economic Development Plan in 1960s, many people went to college because they think highly educated people can lead the nation’s economic development. At this time, many universities founded, and the rate of college entrance automatically increased. Thus, Korea was able to achieve many economic developments in the 1970s and 80s. Over time, Korea’s industrial structure has also changed. In the 1950s and 60s, the main industry of Korea was agriculture, and the demand for highly educated people was low. In the 1970s and 80s, the manufacturing industry developed and the demand for highly educated people was also rise, but not many were needed. But in the 2000s, the development of information communication technology, medical care due to the increase in living standards, and the development of the financial industry to use the manage asset efficiently.
With the need for highly educated people, the rate of college admissions began to rise sharply, and in 2008, the rate of college admissions rose to 83 percent(“The Other Arms Race”). South Korea’s private education craze is also booming, with people hoping to go to prestigious universities, and gain an advantageous position in the job market.

Helicopter Parenting

In line with Korea’s education fever, the word ‘helicopter mom’ has recently become a term referring to mothers of today’s generation. A helicopter mom is a mother who is excessively involved in her child’s work, especially in matters related to education, is called a helicopter mom.

They control and interfere with their children until they reach adulthood. When their kids are in elementary school, They frequently contact school and take care of school work, homework, and even control peer relations. When their kids in middle and high school, they involved in school grades and entrance exams, and when their kids are in college they manage the applying for classes. After graduating from college, they are actively engaged in finding out gets a job and even finding out who gets married.

These mothers let their children have private education, since their children are in elementary school to get their children into prestigious universities, and develop their entire plans by focusing on college. Therefore, children who grow up under these mothers study every day from elementary school until 10 to 12 p.m. If you go to Daechi-dong, Seoul, South Korea you can easily see these scenes, which are often seen at 10 p.m. when the parents of children are waiting to get their children in their car after finishing their academy classes(private educational institution). The reason for this phenomenon is that going to prestigious universities in Korean society increases the chances of getting a high salary and having a stable job. In the Korean labor market, most people go to college, so they want to go to prestigious universities because they cannot gain an upper hand in the labor market by going to ordinary universities. This is another example of Korea’s extreme education fever.

Such helicopter parenting are not only a phenomenon in South Korea. As I mentioned earlier,helicopter parenting are also appearing in many countries such as the U.S. and China because of the passion for education. These helicopter parenting are related to income inequality. Those who grew up in the 1950s’ or 60s’ did not have much pressure on success because there was a small income gap at the time(Tea for Teaching). This is a graph shows that real household income at selected percentiles in the United States. The difference between America’s wealthy, layered, and poor people in the 1960s is about $90,000, but it is a whopping $190,000 gap in 2014 (U.S.  Census Bureau).

In these days, Income inequality in growing  and return of education is being relatively high, that persistence from generation to generation can make income inequality worse, in terms of education investment. Investment of education magnified the income gap(Tea for Teaching). For this reason, many parents spend more time with their children and spend more time and money on education. What I mentioned that the  landscape of Daechi-dong in Korea is the story of children from relatively wealthy families. Due to this phenomenon, the proportion of student from wealthy family in Korea’s prestigious universities is increasing. Helicopter parenting is accelerating income inequality more and more, and in the future our next generation may suffer more from income inequality than our generation, and will be suffer because of the pressure for success.

High educated people in Labor Market, Income inequality

Human capital is very important in the labor market.  Human capital refers to the knowledge and skills workers acquire through education. However, just as physical capital is accumulated through investment, human capital is accumulated through school education and vocational training.People increase their human capital through experience or education. Due to these differences in human capital, people with large human capital have a relative advantage in the labor market, and their income levels are also higher than who does not received high education. A worker will maximize the present value of lifetime earnings by receiving higher education until the marginal rate of return to schooling equal to the discount rate.  The person who receive high education, more likely it is to gain an upper hand in the labor market, and the higher the pay.To check the relationship between higher education and unemployment or employment rates. This graph shows the relationship between probability of reemployment and years of schooling. The people educated high school or less than that, the possibility of reemployment  is about 50%, but more and more years of schooling, the possibility of reemployment is gradually increase and the people who college graduated or more is about 70% chance to reemployed(Riddle and Song 457). So through this graph, the higher education level will affect the employment.The higher the education, the higher the overall income, and the lower the income of workers according to the life-cycle earning curve, the income of the workers is getting higher and after reach  the peak, and income is getting lower and after retirement expenditure is larger than income. The people who received higher education, which means those who have received college education or more than that,when they decide go receive higher education, they earn less than those who entered the labor market right after graduated from high school. Also, going to college results in financial losses at first such as foregone income and college tuition fees. However, after graduating from college and graduate school, as they start to get a job and earn money, the person with higher education exceeds the income of the person who enter labor market right after graduate high school, because of the difference of the human capital.  A firm will expect that the person who had received higher education, has higher productivity than who did not received higher education.

According to data from Bureau of labor statistics,  the people’s wage per week who high school graduate, not college is $730. It is the average earning per week. The people who graduate college the median earning per week is $1,198. If someone receive higher education than bachelor’s degree, the median earning per week is $1,521 per week(U.S. Bureau of Labor).  Based on these data, we can see that based on education level there is a big income difference.

Steve Jobs, Mark Zuckerberg and Bill Gates who dropped out of college but gained great wealth and fame. When you look at these people, you may wonder whether college education can really affect in the labor market. Like the people listed above, they got wealth and fame even if they don’t graduate from college. It can draw the attention of many people because it is extremely rare. They were also people who already had a good personal ability when they dropped out of college.

They were people who were equal to or greater than those who graduated from college in their field. Indeed, those who drop out are relatively at a disadvantage in the labor market. This graph shows that employment rate and unemployment rate of the high school dropout, highschool graduate, college graduates between 16-24 years old people. What you can see significantly in this graph, the difference of employment population between high school dropout and high school graduate. The people who dropped out high school is only 28%, on the other hand, people who graduate high school is 51.7%. Also, people who graduate college have low unemployment rates(14.5%) compare to high school dropout(30.3%) and high  school graduate(28.8%)(U.S. Bureau of Labor).

Conclusion

What we mentioned in this chapter, such as SBTC is tied to the market-size effect; higher skilled workers will continually drive up the cost of production and relative/absolute wages, or On-the-job training and other specified education models can aid in the absorption process of technological change and a high level of education has a great advantage in the labor market, also relates to high income, and because of this person want to their kids receive more education. All the things mentioned in this chapter is about education level and rising skills affect income inequality.

Income inequality has expanded compared to the 1950s and 60s, and income inequality will continue to increase in the future with the development of technology and the increase of education levels. Also, it will continue to be a demand for high skilled labor, they will continue to receive high wages, and demand for low-skilled labors will continue to decrease, and their wages will not change much. Similarly, there will continue to be demand for highly educated people, and demand for low-educated people will be demanded in very limited areas, and even this demand will be reduced. As that happens, the income inequality issue will also be a problem for our next generation too. What should be done to solve this problem of income inequality? Many countries are implementing various welfare policies to address income inequality, but not have a clear effect. In my personal opinion, it is natural that over time to pursue advanced technology and better living standards. However, sometimes we think it’s the right way to pursue the humane life of as many people as possible by looking back instead of just looking ahead.

 

Work Cited

“78. Helicopter Parenting.” Tea for Teaching podcast, 24 Apr. 2019, teaforteaching.com/78-helicopter-parenting. Accessed 12 May 2019

Almeida, Alexandre, and Oscar Afonso. “SBTC versus Trade: Testing Skill-Premia Evidence across 25 OECD Countries.” Applied Economics Letters, vol. 17, no. 13–15, Sept. 2010, pp. 1497–1501.

Acemoglu, Daron. “Patterns of Skill Premia.” Review of Economic Studies, vol. 70, no. 2, Apr. 2003, pp. 199–230.

Augenblick, John G., John L. Myers, and Amy Berk Anderson. “Equity and adequacy in school funding.” The Future of Children (1997): 63-78.

Avery, Christopher, and Sarah Turner. 2012. “Student Loans: Do College Students Borrow Too Much–Or Not Enough?” Journal of Economic Perspectives, 26 (1): 165-92.

Caligula’s Horse. (2019). US College Enrollment (1955-2010). [online] Available at: https://caligulas-horse.blogspot.com/2016/08/us-college-enrollment-1955-2010.html. Accessed 12 Mar. 2019.

Chetty, R., & Friedman, J. N. (2010). Does Local Tax Financing of Public Schools Perpetuate Inequality? National Tax Association Session: Tax Policy Lessons from Administrative Tax Records,112-118.

“Employment and Unemployment of Recent High School Graduates and Dropouts : Career Outlook.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, July 2015, www.bls.gov/careeroutlook/2015/data-on-display/dod_q4.htm. Accessed 5 April 2019.

Heckman, J., & Lafontaine, P. (2006). Bias Corrected Estimates of GED Returns. doi:10.3386/w12018

Lazar, I., & Darlington, R. B. (1982). Lasting effects of early education: A report from the Consortium for Longitudinal Studies. Monographs of the Society for Research in Child Development, 47(2-3), 1-151.

Lloyd-Ellis, Huw. “Endogenous Technological Change and Wage Inequality.” American Economic Review, vol. 89, no. 1, Mar. 1999, pp. 47–77.

“The Other Arms Race.” The Economist, The Economist Newspaper, 28 Oct. 2013, www.economist.com/special-report/2013/10/28/the-other-arms-race. Accessed 10 March, 2019

Payne, Kevin J., and Bruce J. Biddle. “Poor school funding, child poverty, and mathematics achievement.” Educational researcher 28.6 (1999): 4-13.

Riddell, W. Craig, and Xueda Song. “The impact of education on unemployment incidence and re-employment success: Evidence from the US labour market.” Labour Economics 18.4 (2011): 453-463.

Rose, Maria C. “Using ACT and GED scores as indicators of success for postsecondary students enrolled with GED certificates.” Research and Teaching in Developmental Education (1999): 55-64.

US Census Bureau. “Real Household Income at Selected Percentiles: 1967 to 2014.” Real Household Income at Selected Percentiles: 1967 to 2014, 25 Apr. 2016, http://www.census.gov/library/visualizations/2015/demo/real-household-income-at-selected-percentiles–1967-to-2014.html.

License

Icon for the Creative Commons Attribution 4.0 International License

Income Inequality and Intergenerational Mobility by John Kane, editor is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

Share This Book