inequality

Economix Blog: Nancy Folbre: The Once (but No Longer) Golden Age of Human Capital

June 10, 2013 by NewsMaker Leave a Comment

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Only slightly more than half of college presidents (54 percent) believe that a bachelor’s degree is worth more or a lot more than five years ago, according to a recent survey conducted by the Chronicle of Higher Education.

A majority of Americans (57 percent) say the higher education system in the United States fails to provide students with good value for the money they and their families spend, according to a recent survey by the Pew Research Center.

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It seems that the golden age of human capital is losing its shine.

That shine came not just from a high rate of return (both individual and social) on a college degree, but also from a beautiful, if partial, alignment between ideals of human development and the needs of employers.

It was a happy alignment, not just for college professors and their students, but for the soul of capitalism itself. Academic striving would be rewarded. Merit would prevail. Students willing and able to invest in their own abilities had a good shot at permanent prosperity.

Not anymore. Problems are particularly conspicuous on the supply side: declining state support, higher tuition and fees, increased inequality of access and the growing burden of debt. The investment costs more than it once did and remains beyond the reach of those who need it most.

Problems are also increasingly apparent on the demand side: high unemployment and underemployment rates among college graduates.

Historical data suggest that investing in college still offers significant economic benefits to those who actually complete their degree requirements and find employment (especially if they enjoy parental support or generous financial aid).

But private rates of return have begun to decline. Uncertainty about future benefits lowers the expected dollar value of a degree. Rates of return differ widely by personal characteristics, the institutions students attend and the majors they choose.

In their highly respected economic history, “The Race Between Education and Technology,” Claudia Goldin and Lawrence Katz contend that the demand for college-educated workers began to outstrip the supply in the United States about 1980. Since then, the college premium, or difference in lifetime earnings between those with degrees and without, has increased.

But in the 1990s the global supply of college-educated workers burgeoned and large American corporations improved their ability to use skilled labor in other countries. As the economist Richard Freeman points out, developing countries have invested heavily — and successfully — in their higher education systems. In 2005 Chinese universities awarded five times as many bachelor’s degrees as they did in 1999.

This global expansion of the educated labor force is likely to put downward pressure on the college premium in the United States.

Another possibility is that the demand for highly educated workers has changed shape in recent years. With vast improvements in information technology, employers may now seek a small number of specialized, technically trained experts rather than a large number of versatile, diversified liberal arts graduates.

Certainly students are now encouraged to think more strategically about their majors and to specialize in more technical fields. This is good financial advice, but it won’t guarantee success. Unlike financial capital, which can be easily moved from one investment to another, investment in human capital represents a sunk cost.

If more and more students pile into science, technology, engineering, and mathematics, the wage premiums for those majors could decline. With a high rate of technical change and continued globalization of labor markets, some students could also find their specialization obsolete. Someday soon there will probably be an app for writing apps.

The evolution of the global human capital market has momentous political implications. Like many Democrats, President Obama is bullish on human capital. He favors increased public investment in education, ranging from early childhood to post-secondary programs. The assertion that such spending will generate a high individual and social rate of return is based on the optimistic expectation that demand for better-educated workers will remain strong.

On the other hand, many critics of public-education subsidies are bearish on human capital. The economist Richard Vedder, for instance, warns against both private and public overinvestment in education, pointing to the growing tendency for college graduates to land in jobs that don’t actually require the credential they hold.

If the bears are right, we may be moving toward a stage of capitalism less dependent on a growing supply of home-grown human capital. In that case, many of those bullish on higher education investments in the United States could end up as red meat.

Those who believe, as I do, that education has intrinsic value both to individuals and to society as a whole should reconsider their habit of relying on market-based private rate-of-return rhetoric.

Rather than bowing to market forces, an intelligent, well-educated citizenry would bend those forces toward better ends, including the best possible development of human capabilities.

Article source: http://economix.blogs.nytimes.com/2013/06/10/the-once-but-no-longer-golden-age-of-human-capital/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: college presidents, inequality, rate of return

Economix Blog: Why the Minimum Wage Doesn’t Explain Stagnant Wages

September 5, 2012 by NewsMaker Leave a Comment

Until the mid-1980s, only a single state – and one of the smallest in population, Alaska – had set a minimum wage higher than the federal minimum. But with the federal minimum remaining unchanged at $3.35 an hour for most of the 1980s, more states began to set higher floors for wages.

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By the end of the 1980s, a dozen states had their own, higher minimum wage. By 2008, 32 states did. The number has fallen to 18 today, because the federal minimum has risen since 2008 – it’s now $7.25 an hour – and overtaken some state minimums, but the 18 include several large states. In Illinois, the minimum wage is $8.25. In California, it is $8. In Florida, it is $7.67.

As a result of these state minimum wages, the federal minimum is not as important as it once was. It applies to less than 60 percent of the population.

In this space, we have been examining the causes of the American income slowdown – over both the last decade and the last generation – and our recent list of 14 possible causes included the stagnation of the federal minimum wage. That stagnation certainly matters: in 1968, the minimum wage was 45 percent higher than it is today, adjusting for inflation.

But I think it’s fair to say that the minimum wage is not one of the most important causes of the income slowdown. The minimum wage instead belongs on a list of secondary causes. It probably did play a substantial role holding down the pay of low-income workers in the 1980s and in increasing inequality, as research by David S. Lee and others has found. But its role seems to have been much smaller in the last two decades.

I’ll confess that I did not expect to come to this conclusion. When we started this project, I assumed that the minimum wage would have played a larger role. If others think it has, we welcome hearing from them.

The crucial point is that the minimum wage has risen, even after adjusting for inflation, over the last 20 years. The reason it is so much lower now than in the late 1960s is that it declined so much from the late ’60s through the late ’80s.

The effective minimum wage today – a national average taking into account both the federal and state minimums – is about $7.55, which is more than 10 percent higher in inflation-adjusted terms than the effective minimum in 1990. Today’s effective minimum is also about 7 percent higher than in 2000.

Yet the overall pay of people at the bottom of the income ladder has been virtually unchanged since 1990, according to Census Bureau data. And pay at the bottom (as well as the middle) has fallen since 2000. The rising tide of the minimum wage, to use President John F. Kennedy’s formulation, has not kept most boats from falling.

Why doesn’t the federal minimum wage matter more than it does?

For all the economy’s problems, American society is still richer than it was a generation ago, with fewer low-wage workers. As a result, fewer are subject to the minimum wage than would have been the case in the past. The biggest changes have occurred among women.

In the 1970s, women made up the great majority of minimum-wage workers. But as women’s pay has risen, the share making the minimum wage has dropped sharply. Over all, about 5 percent of all hours worked in 2009 were paid the minimum wage or less (some businesses, like restaurants, are exempt). That was down from 8 percent of hours in 1979, according to research by David Autor of the Massachusetts Institute of Technology, Alan Manning of the London School of Economics and Christopher L. Smith of the Federal Reserve.

The decline is almost entirely the result of rising women’s wages. About 4 percent of men’s hours are paid at or below the minimum wage, down only slightly from 5 percent in 1979. For women, the decline was much bigger: to 6 percent, from 13 percent.

None of this is meant to suggest that the minimum wage is irrelevant. It affects not only minimum-wage workers but also those paid slightly more, who often receive raises when the minimum rises. If Congress increased the minimum wage to its inflation-adjusted 1968 level, a large number of poor people would receive a raise. Some would also lose their jobs, if their employers decided they could not profitably pay the higher wage. But research suggests that modest increases in the minimum wage do not have a large effect on employment.

All in all, a higher minimum wage would probably lead to a rise in pay for lower-income workers in general and a decline in inequality.
The 1980s help make that case in reverse. The federal minimum did not change from 1981 to 1990, causing its inflation-adjusted value to fall 30 percent during that time. Wages in the bottom of the income distribution fell sharply, even more sharply than they have in the last decade. The inflation-adjusted wage of a worker at the 20th percentile of the distribution dropped 9.5 percent from 1981 to 1990, according an analysis of government data in the forthcoming book “The State of Working America, 12th Edition,” by the Economic Policy Institute.

Mr. Lee, a Princeton economist, argues that the minimum wage accounted for “much of the rise” in inequality in the bottom part of the income distribution in the 1980s. David Card of the University of California, Berkeley, and John DiNardo of the University of Michigan have made a similar argument. Mr. Autor, Mr. Manning and Mr. Smith suggest the effect was smaller but agree it existed.

Since 1990, though, the minimum wage has risen. If you’re trying to understand why every income group except for the affluent has taken an income cut over the last decade, you probably shouldn’t put the minimum wage at the top of your list of causes.

In coming weeks, our look at other causes will continue.

Article source: http://economix.blogs.nytimes.com/2012/09/05/why-the-minimum-wage-doesnt-explain-stagnant-wages/?partner=rss&emc=rss

Filed Under: Business News Tagged With: closer look, inequality, inflation

Economix Blog: Growing Economies, Stagnant Wages

November 4, 2011 by NewsMaker Leave a Comment

CATHERINE RAMPELL

Dollars to doughnuts.

In the midst of the Occupy protests, the income gains going to the top 1 percent have gotten a lot of attention. Another way to understand the economic frustrations of the Occupiers is to look at how much middle-class living standards have changed, and how much the overall economy has grown.

A new report from the Resolution Foundation, a British research organization that focuses on workers with low income, has done just that. The report covers 10 rich countries, and looks at the growth rate of median pay versus economic growth per capita from 2000 to the start of the Great Recession.

Here’s the key chart showing that ratio:

A higher ratio means that the pace of growth for median pay was close to the pace of growth for output per capita. A low ratio means that median pay grew much more slowly than did the economy as a whole.

Of the 10 countries analyzed, Finland showed the closest relationship between the living standards of the typical worker and improvements in the overall economy. The United States was on the lower end. From 2000 to 2007, median pay increased at a quarter of the pace of output per capita. In other words, the typical American worker did not share much in the country’s growing wealth even when the economy was good.

Still, the United States was not the worst of the bunch. In Canada, median pay didn’t grow at all between 2000 and 2007.

The moral of the story is that the United States isn’t the only country experiencing growing inequality. Most of the rest of the developed world is, too.

Article source: http://feeds.nytimes.com/click.phdo?i=fddc1c45a1b8da84e472f0bcb44422fa

Filed Under: Economy News Tagged With: capita, inequality, typical worker

From Spending to Cuts, While the Economy Stalls

August 1, 2011 by NewsMaker Leave a Comment

The emerging outlines of a deal to cut spending by at least $2.4 trillion over 10 years, with a multibillion-dollar down payment later this year, would complete an about-face in the federal government’s role from outsize spending in the immediate aftermath of the recession to outsize cuts in the future.

Last week brought the disconcerting news that the economy grew no faster than the population during the first six months of the year, in part because of spending cuts by state and local governments. Now the federal government is cutting, too.

“Unemployment will be higher than it would have been otherwise,” Mohamed El-Erian, chief executive of the bond investment firm Pimco, said Sunday on ABC. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”

He added, “We have a very weak economy, so withdrawing more spending at this stage will make it even weaker.”

The agreement would end months of single-minded debate about the federal debt that has diverted Washington’s attention from broader economic questions, and indeed threatened the health of financial markets as investors watched and wondered whether the United States might really decide, quite voluntarily, to leave some bills unpaid.

If both chambers of Congress give their approval by Tuesday night, the government will have averted the danger of a self-inflicted financial crisis, but only at the expense of public confidence in its ability to address the nation’s broader economic malaise.

The looming challenges include a renewal of the standoff over the federal budget at the end of September, and the scheduled expiration at the end of 2012 of the broad tax cuts passed during the administration of President George W. Bush.

President Obama said Sunday night that the deal “begins to lift the cloud of debt and the cloud of uncertainty that hangs over the economy.” He added that political leaders now “should be devoting all of our time” to the nation’s broader economic challenges.

But economists say the deal could complicate that task. There is broad agreement that the United States needs to pay down its debts, but most economists say the government should have waited a year or more for the economy to strengthen.

“We sure missed a big window of opportunity to reduce our debt in those strong years when asset prices were booming,” said Carmen Reinhart, senior fellow at the Peterson Institute for International Economics and co-author of “This Time Is Different,” a history of debt crises. “Instead we’re stuck trying to do it now, when the economy is so weak.”

The economy grew at an annual rate of only 0.8 percent during the first half of the year. Millions of homes remain empty. Twenty-five million Americans could not find full-time jobs last month. And even without the debt ceiling deal, federal spending is in rapid decline. Little remains of the federal stimulus money. Payroll tax cuts are set to expire at the end of the year.

The combination of the budget-cutting government’s plans and the grim economic news is likely to increase pressure on the Federal Reserve, which will hold a scheduled meeting on Aug. 9, to reconsider its declaration earlier this summer that it has done enough to aid the economic recovery.

After four years of extraordinary efforts to promote growth, including a continuing campaign to hold down interest rates for at least a few more months, officials at the central bank say they are reluctant to do more. But the Fed’s chairman, Ben S. Bernanke, said if the economy deteriorates and there is a growing risk of deflation or a broad decline in prices, policy makers could act.

The Fed’s options include pledging to maintain low interest rates for a specified period of time or increasing its holding of government debt in a bid to further reduce rates.

“It’s difficult to find a textbook to tell you what should you do now,” said Torsten Slok, chief international economist at Deutsche Bank.

The Republican authors of the debt ceiling deal say that cutting the size of government will increase economic growth down the road because federal borrowing soaks up money otherwise available to private businesses and federal spending distributes that money inefficiently.

Some conservative economists argue that even the immediate impact of a deal could be positive. Classic economic theory holds that people respond to the growth of government by spending less of their own money, because they assume that taxes will increase. A reduction in the federal debt therefore should encourage people to spend more of their money.

Article source: http://feeds.nytimes.com/click.phdo?i=2ec7eac40fd495a20a65732079e8427b

Filed Under: Business News Tagged With: dollar down, economic questions, inequality