A college degree and the earnings of the middle class

Several of you have been sharing recent news stories on the income distribution and whether the middle classes stand to gain or lose from globalization. We know from Stolper Samuelson that unskilled labor in the rich countries could get hurt, but what about the college educated middle class?

John B. sent me an interesting article from Germany's Spiegel which has a sweeping historical piece that argues that the United States has been witnessing a "break with its golden age, when the country produced prosperity for almost everyone." The site is worth visiting if for no other reason than to check out this short graphic essay which depicts the relative growth of the United States economy versus that of Europe, India and China from 1820 through the present, including a projection of the size of these economies in 2050.

China is projected to have an economy of USD 44.5 trillion in 2050 against the USD 28.5 trillion. In my opinion the article ends somewhat unsatisfactorily pointing to the United States large and persistent trade deficit as its main indicator of a supposed decline ... (some have pointed to the counterpart to this deficit -- the huge US capital account surplus as a sign of a certain vitality, so a trade deficit alone hardly seems to make the case).

Speaking of the income distribution, today's Washington Post carried a story on the returns to college education. Turns out that recent census data reveals that completing a college education on average raises annual income by $23,000 compared to someone who only has a high school degree (good reason to study for that midterm!). That's still a lot, but the data reveals that that income gap is starting to narrowed from five years ago "when college graduates made nearly twice as much as high school graduates."

This unfortunately does not mean that the real incomes of college graduates and the middle class are actually rising. It might just mean that the incomes of those without college degrees aren't falling as fast! In fact George D sent me an article from today's Wall Street Journal suggesting that if you look at the data by educational attainment:

"the only group that enjoyed rising wages between 2000 (just before the onset of the last recession) and 2005 (the most-recent data available) were the small slice with graduate degrees."

That's to say people with MBAs, JDs or Ph.Ds.

But don't be misled -- getting a Ph.D. does not necessarily lead to higher incomes in all disciplines. Getting an advanced degree can lower your lifetime earnings by keeping you out of the workforce for a long time, and because people who like studying that much are typically not seeking to maximize income. Not to mention the number of new Chinese doctorates in the pipeline.

More importantly, this data is just looking at relative growth over the past five years. This seems like hardly enough to spot any major new trends. But that of course, was no deterrent to this journalist, who finished the article grandly:

It is in the middle -- where many four-year college graduates work -- that imports, overseas outsourcing and technology seems to be reducing U.S. employer demand most significantly, and thus restraining wages.

That is the kind of shift in the tectonic plates of the economy that produces political earthquakes.

Perhaps.... but trade is not the only thing, or necessarily even the main thing, driving the income distribution. It seems still a bit too early to declare the final outcome and the culprit.