Harvard economists Claudia Goldin and Lawrence Katz say the slowdown in education attainment has been driving the increases in income inequality among American workers
FOR MOST OF the 20th century, America truly was the land of opportunity. The nation emerged as the world’s dominant economic superpower, and the prosperity that resulted was widely shared. A growing middle class had every reason to believe in the promise of the American Dream in which each generation is poised to do better than the one before it. Starting in the late 1970s and early 1980s, however, Americans’ hold on that dream became increasingly tenuous. More and more families struggled economically to get ahead or even stay in place. In recent years, that shaky hold on middle-class life has given way to economic free-fall for millions of Americans. The growing income inequality that now characterizes the country’s wage distribution has become one of the defining economic features of the early 21st century.
Everything from economic globalization to the decline of unions has surely played some role. But Claudia Goldin and Lawrence Katz have peeled back the layers on a very complicated story to offer a sweeping explanation for what’s happened over time with US wages.
At the root of changes in the wage structure, argue Goldin and Katz, professors of economics at Harvard, is a race that has been taking place between technological advances and education. For much of the 20th century, as technological developments increased the demand for more skilled workers, Americans more than kept pace by climbing the education ladder. The early 1900s witnessed huge increases in high school attendance, while the period after World War II saw a similar surge in college completion rates.
Technological advances brought higher wages to those with skills to meet the new workplace challenges, and the growth in educational attainment, in turn, meant these wage premiums were shared widely across a growing American middle class. What’s more, although this wage premium provided a strong incentive to go further in school, the burgeoning supply of educated workers meant the wage premium didn’t race wildly ahead of pay for less educated workers.
Goldin and Katz say this slowdown has, as a function of simple supply and demand economics, increased the wage premium for better educated Americans—and helped drive a growing wedge between their earnings and those of less educated workers. “The slowdown in education at various levels is robbing Americans of the ability to grow strong together,” they write in The Race Between Education and Technology, their 2008 book that lays out this story.
Goldin and Katz say the shared economic prosperity that Americans enjoyed for much of the 20th century was fueled by an education system characterized by a set of important egalitarian “virtues” that set us apart internationally. Among these was the wide accessibility to publicly-funded schools, which churned out high school graduates at rates far greater than those in European countries, where there was a belief that education was for society’s elites, not its masses. But an open education system, in which even those who stumbled a little could make their way through high school, eventually began to seem like more of a liability than asset, as American high schools produced graduates who seemed increasingly ill-prepared for the rigors of college studies that more people were pursuing. The education system’s one-time “virtues are no longer as virtuous,” Goldin says in our interview.
The standards era in US education arose in response to such concerns, but we are still struggling mightily to get students to the levels of proficiency necessary for success in college and the high-skills careers of the 21st century. Goldin and Katz offer no easy fix for the slowdown in educational attainment. But they make a compelling case that addressing our education deficits is the only way we’ll lessen the yawning income gaps that have emerged and return to a time of broadly shared prosperity.
Goldin and Katz are personal as well as research partners, and are well matched for the task of mining decades worth of data relating to technology, education, and wages, and finding a coherent story in it. Goldin is an economic historian with a particular interest in education, while Katz is a labor economist who served as chief economist for the US Labor Department during the Clinton administration.
The country’s growing income inequality has been at the heart of protests that unfolded this fall on Wall Street in New York and spread to other cities, including Boston. Demonstrators have decried the massive concentration of wealth among the top 1 percent, saying they are rallying on behalf of the other 99 percent that are struggling to keep their heads above water. Goldin and Katz are quick to say education gains will not solve the jobs crisis we are facing, which has to do with huge slowdowns in spending and other macroeconomic forces set loose by the financial crisis. They also haven’t focused their research on the outsized wealth accumulation of those at the very top, as disturbing as some may find those payouts to be. The economic divide Goldin and Katz document has emerged between the top 20 or 30 percent of the population and the bottom 70 or 80 percent, and it is that chasm, they say, that is causing the once sturdy foundation of the American middle class to buckle and crack.
I sat down to talk with them a short hop down Mass. Ave. from the Harvard campus, at the National Bureau of Economic Research, where they also serve as research associates. What follows is an edited transcript of our conversation.
LAWRENCE KATZ: A hallmark of the US economy over the last 150 years has been very rapid, dynamic technological change. When we expand access to education, we get the double benefit of a more skilled workforce and new technologies that raise the productivity of people who are able to keep up. In the periods with fast technology change and rapid growth and access to education, we get balanced growth where we have shared prosperity.
CW: And that’s what we saw for a good part of the 20th century?
KATZ: Yes. When we had huge changes in technology early in the 20th century—electrifying the factory, all sorts of new things in transportation, modern germ theory in medicine—we had a high school movement and then expansion of college [that allowed skills to keep pace with technology]. We have had a dramatic slowdown in that. Today, a 30-year-old is more educated than his or her parents, but not by much. His or her parents have more years of schooling than the grandparents, and that’s been the hallmark of the US. You really need that to keep pace with technology. That’s where we’ve really slowed down.
CW: You write about the continued expansion of education here to more and more of the population and its close connection to the shared prosperity that Americans enjoyed for so long. Should we really think of that as the distinguishing feature of what we sometimes call “American exceptionalism?”
CLAUDIA GOLDIN: And other developed countries looked over their shoulders and said, “What should we copy?” And much of Northern Europe has changed from apprenticeship program systems to high schools that look more like our high schools [by preparing students for college].
KATZ: This country, whether it’s a small town in Iowa or in Massachusetts, had a commitment to providing education not just for an elite core, but for the broad population. Europeans who looked at us thought that this was very strange. They had a much more elitist view. They viewed it as a waste of resources to try to educate everyone through the secondary schooling level in a general set of skills. They have certainly changed their view. We took a tremendous lead in the 20th century economically [because of this]. By the mid-20th century we were light years ahead on education. What is striking today is if you look at a 55-year-old, Americans are still, by far, the most educated country in the world, but if you look at a 25-year-old we’re right in the middle of the pack among wealthy countries and losing ground substantially.
CW: That’s the trouble.
KATZ: Yes. We still draw people from around the world to go to higher education at our better schools and most flagship state universities. But in terms of access to college and preparation [in the K-12 system] before getting there, we are really lagging.
CW: You write that the rate of technological change and the demand for new accompanying levels of skill has been fairly steady throughout the last hundred years. We like to think that the world has turned upside down in the last decade or two, in this case because of the computer revolution. Maybe every generation feels that way.
KATZ: Think of just things that happened in the late 19th, early 20th century—whether it’s the automobile, the plane, electrification, germ theory. Computers are wonderful and revolutionary, but there have been many other things that have had huge impacts both on our lives and on the workplace. We’ve had a steady stream of innovations, and with all of them, rapid change benefits more educated people who are able to learn and pick up new things. That’s where a very good general education system that the US set up, as opposed to a very apprentice specific-skill one, has had a very big payoff.
CW: There’s been a lot of concern around immigration, with the suggestion that it has been a contributor to income inequality by further depressing wages at the lower end of the wage scale. You write that it is a factor, but a relatively minor one.
KATZ: Yes. In terms of changes in skills and how fast education is racing versus technology, immigration has been a very small factor relative to the slowdown of educational attainment growth among the US-born population.
CW: The declining fortunes of unions also coincide with the beginning of this period of rising inequality. But you say this, too, is a much smaller factor than the broad slowdown in educational attainment.
KATZ: Yes. It certainly reinforces and contributes to it, but they’re two issues. If you think about the middle of the income distribution and what used to be high-wage, high school [graduate] jobs and the lower half of college [graduate] jobs, the educational slowdown is important, but there have been some technological changes, and outsourcing opportunities have also played a role in really hollowing out the middle. But we haven’t had the proper educational response to move people who used to have a middle management job or a high-wage production job that can be computerized or done offshore into higher level jobs. If you look at our data, just like the 1940s had a bigger [wage] compression than you would have thought from this race between education and technology, because of the rise of unions and the role of government wage setting, the growing inequality that started in the late 1970s to the mid-80s is bigger than our model predicts because that really was the last hurrah and then decline of unions. So the decline in unions played a role, but it’s sort of 20 percent of the story, not most of the story.
CW: In the very final pages of the book you sound some cautionary notes and say college is no longer an automatic ticket to success and talk about some of the ways that there could be threats to the economic returns from college education.
GOLDIN: Some of [the reason to go to college] is going to be for consumption purposes. You want to be a thoughtful person. You want to think deep philosophical thoughts on your deathbed and things like that. But by and large, sometime in the 20th century education became less consumption and more investment. When you go to college you have to think about what it is that you’re going to be doing with that degree. It’s a changing world. And so the best college education is one that’s going to give you some specific skills but also a lot of general skills to make you a person who can be flexible and adapt.
KATZ: A high quality liberal arts education that allows you to think for yourself is going to be much more valuable to a wide range of employers than just doing a business major and just knowing a very specific set of management or accounting skills. If we look at what’s going on in the labor market recently, for the bottom half of college [graduates], wages are pretty flat, but they’re even worse for the top half of non-college [graduates]. So if you didn’t go to college, can you count on getting a manufacturing job today that pays a high wage? Absolutely not. So the return [on college education] is actually still extremely high, but how well you’ll do, say, relative to your parents is not looking very good if you’re a middle [level] college graduate.
CW: But it still beats the alternative.
KATZ: It beats the alternative, but that’s more because the alternative [income for non-college graduates] has gotten so bad.
CW: If we are being hurt by this sort of stalled level of educational attainment, how do you propose that we fix it?
KATZ: This is the very hard unanswered question. One issue is how much of the problem is caused by people that are really college-ready but can’t afford college or they can’t get into classes. That is playing a role. Better school financial aid would help. In the early 20th century, we basically made high school free for everyone. Today, in the 21st century, college education is as important as high school was. So cost still matters. But a much bigger factor is that too many American youth are not college-ready.
So even when they go to college, they’re taking developmental/remedial courses, they’re dropping out. So what happens in K-12 and before is crucial. There are some low-hanging fruit. Improved access to quality early childhood education has a very high payoff. The very difficult part is what can we do to reignite our K-12 system, which used to be the best in the world? We’re still trying to get in the black box. Do urban charter schools in Boston seem to pay off? Yes. But do the nonurban charter schools in Massachusetts seem to work? Absolutely not seems to be the evidence. Are smaller classes the answer? Absolutely not. Are higher quality teachers? There’s very strong evidence that improving the way we recruit and treat teachers could be a very important component. Getting parents involved early on is clearly an important component.
CW: You write at one point that there are some people who might say, in challenging your arguments, that there’s a natural limit to the pool of students here who are going to be able to go to college and succeed there.
GOLDIN: Why should it be different in other countries [where college graduation rates are increasing]? I think that the financing part is really important. The impact goes down to the person who is in sixth grade and looking ahead and realizing, “I can’t afford it. My parents will not be able to afford this.” The incentives are then different. Canada is doing a remarkable job in providing college education to individuals from all parts of the socioeconomic status distribution, and we’re doing a lousy job of it. We don’t find that Canadian students, when they enter college —and they are entering college in large numbers from all different backgrounds—have problems with remediation. So they’re doing something right at the high school level, and it may be that because college is so available, so accessible, kids at the lower level take things a lot more seriously.
CW: You kind of scratch your heads at one point late in the book about our lagging educational attainment, given that, as economists, you see that there is such a rational argument for going to college in terms of the return on this investment.
KATZ: The incentives are so high.
CW: You say that young people are leaving money in the streets.
GOLDIN: What we might also say is that the society is leaving money in the streets. Those north of the border [in Canada] have decided to have higher taxes and spend more on education. And we have decided that we have user fees that put a lot of the burden on kids for whom this is a tremendous burden that they don’t want to take up.
CW: You can certainly argue that if a college degree is as necessary today as a high school degree was at some other time then it would follow that it ought to be publically available.
KATZ: My vision is everyone would have access to at least several years of college directly free. Their higher earnings, their future income and payroll taxes would essentially pay for that over the long haul.
GOLDIN: The real kicker here is the high school graduation rate. The fact that it has slowed down—the rate of increase—and reached a plateau and it’s not going anywhere. And we have this great second chance system with the availability and accessibly of the GED, but does that dampen what happens in high schools? Does that mean that the kid who isn’t doing well, says, “Well, I’ll just drop out and, just like my uncle, I’ll go get a GED later.” And then doesn’t. We’re not going to be able to really push the margin on college if what’s going on in high school isn’t improving. Because you don’t take someone who dropped out in 11th grade and put them in college. But even among the students who are graduating, and it’s not just at the margin, there really is an absence of standards that has led a large fraction of them to go off to college, even some relatively good colleges, and not be truly college-ready.
CW: The picture that you paint, even in this discussion of rising inequality, is still one of a system that is, in some ways, a meritocracy, in the sense that you’re saying a middle-class life is still within reach through higher educational attainment. It’s a different argument about inequality than the one we’re hearing about so much today, which focuses on this idea of soaring wealth that is concentrated among the top 1 percent. It almost seems like you’re talking more about an 80/20 split than a 99/1 divide.
GOLDIN: People have said, “What about this incredible increase in incomes at the very, very top.” That in many ways is a different story. We’re not dealing with that. We’re dealing with 99 percent of the population.
KATZ: Our explanation is pretty good for the bottom 99.5 percent. The top half percent has obviously much more to do with the massive growth of finance, with the politics of corporate governance, and changes in the norms up there.
CW: But it certainly doesn’t seem to be part of some rational kind of labor market explanation that they are commanding these returns because they are offering such scarce talent that is in high demand.
KATZ: Certainly people would still have incentives to work for millions versus tens of millions.
CW: Is it fair to say, then, that your view is that it hasn’t been that bleak a time for the 20-some percent of the US adult population with at least a four-year degree?
KATZ: It’s more like 30 percent. Of the top half of that group, which is saying 15 percent of the population—people who went to the more elite colleges, people who did post-college training—it’s been fine times. The bottom half of that group was doing well except for the last 20 years. The return to people in the bottom half is still high, though, because it’s even worse to be in the non-college group.
CW: Your book was completed before the recession. How has the economic crisis affected the race between education and technology? Or maybe the question is, how has the recession reflected it?
GOLDIN: Well, one answer has to do with college students and the problem that they have in funding. Here’s a very good way of thinking about it. The Great Depression was pretty bad times. It saw a huge increase in high school [attendance], and the reason was that these kids—particularly the boys—couldn’t get jobs so they went to high school. Why did they go to high school? High school was free. Fast forward. In the Great Recession, we can’t have the same thing because, although they can’t get jobs, they can’t go to a [higher education] school that’s free because there is no school that’s free.
CW: It’s not a refuge to wait it out and build skills.
GOLDIN: Exactly. One of the positive sides of the Great Depression, and it was a positive side of many downturns, was that you went out and got more skills.
CW: Although I have heard about more people going on to college or grad school because of the bad job market.
KATZ: There has been an increase in enrollment rates in college, but it’s not tremendously large. Many more people apply to graduate school, but Ph.D. programs can’t suddenly admit twice as many people, so the odds of getting in have gone down. The supply of slots in post-college programs is pretty inelastic. Where has there been a flexibility of supply in college? [The] crowding [into] community colleges and the huge growth of for-profit higher education institutions.
CW: Unemployment rates are very tightly correlated with educational attainment levels. The South Coast area—New Bedford and Fall River—and the Merrimack Valley, which have low educational attainment rates, have the state’s highest unemployment. That seems to reflect or reinforce this point about the returns and the value of education.
KATZ: Areas that have more educated workers tend to withstand recessions much better and that is still true. Expanding education is very important. What is certainly not true, however, is that we could get out of this recession just by educating more people. We need to create employment opportunities to make use of that education. But as long as employers aren’t hiring because they don’t think there’s a lot of business, just having more educated workers alone won’t change things.
GOLDIN: Depressions and recessions, any economic activity that leads to unemployment, is not what we call sharing the pain. Some people feel it a lot more than others, and those who feel it a lot more are generally those who, as you just pointed out, are the ones least able to take on more pain.
KATZ: Making sure that people have access to education is incredibly important for the long-run health of the economy and for inequality, but that shouldn’t be confused with the view you hear some people saying—some Federal Reserve Board governors and others—that the reason we have high unemployment now is because all our workers are not educated. We’re no less educated than we were in 2007 when we had an unemployment rate under 5 percent. We have a macroeconomic dilemma with very low demand as people are deleveraging and cutting back on purchasing. We need to solve that problem. We’ll be much better off once we solve that problem if we have a higher educated workforce. But that’s not the reason we have a 9 percent unemployment rate today.
CW: Right. What’s happened in the last 30 years is sobering. But in the longer, broader view is the story you tell an encouraging or optimistic one? This earlier, long period of rising educational attainment and shared prosperity suggests the inequality we have is not intractable. Identifying what needs to happen to lessen inequality, of course, is a very different thing than figuring out how to make that happen.GOLDIN: It points to the importance of studying history. We were writing this book during a time of rising inequality, and there were a lot of fingers being pointed and we had stagnant education in various ways. But few people looked back and said this was once a nation that invented an educational system that other nations have copied and have managed in copying it to leapfrog ahead of the US. That in many ways is the point of the book, to say this was once a great system, how can we recover a great system? We don’t know exactly how to accomplish it. If we knew how, we wouldn’t be sitting here and talking to you; we’d be out there doing it. There are no easy fix-ups.
KATZ: History does give one some optimism. If you hear the voices speaking in the late 19th century, early 20th century, leading into the Progressive movement, many of the current critiques of our education system and of immigration and of inequality show up. And yet we know we then had 70, 80 years of shared prosperity. That doesn’t prove one can do it, but looking back at history one certainly sees the things that appeared to be intractable.