Cities, College Grads and the Inequality Gap

In all of the research about the widening gulf between the well off and everyone else in America, one finding has reappeared consistently: The gap today is largely a function of the increasing returns that education, and specifically a college degree, provides. Since the early 1980s, the premium that the market has placed on a college degree has grown rapidly as the country has shifted to a more knowledge-based economy, as the recently published book The Race Between Technology and Education, by two Harvard economists, Claudia Goldin and Lawrence F. Katz, argues.

Meanwhile, a number of researchers, ranging from Ed Glaeser at Harvard to Richard Florida (at the University of Toronto), have noticed that many of these college grads have migrated to a few thriving cities—places like San Jose, Boston, Washington, D.C., and San Francisco. Prof. Florida has even argued that the amenities of these places have attracted the professional class and enriched the cities, sparking enormous debate about how other cities can lure college graduates and prosper as well.

Now along comes University of California, Berkley, economist Enrico Moretti with another take on the educated class and their migration patterns. Looking at the data that shows how college grads are sorting themselves into a relatively few expensive metro areas, Moretti wonders whether the cost of living isn’t eating up some of those income gains that college provided to these grads. And if so, why do so many of them still choose to live in these pricey places? What his preliminary findings, presented in an unassumingly titled working paper, Real Wage Inequality, suggest may change some of our ideas not only about the income gap, but about our efforts to bridge that gap.

Moretti’s big leap is to look at the income gap not simply as it is traditionally viewed—by class, by education, by race—but to look at it in terms of local costs, because “skilled and unskilled workers are not distributed uniformly across cities within the U.S.” Using adjustments to the local consumer price indices of metro areas, including the cost of different types of housing, Moretti, a research associate at the National Bureau of Economic Research, determines that prices have been rising much faster for college grads: Housing costs for college grads, for instance, were 19 percent higher than for non-grads in 1980, but by 2000 had grown to 44 percent higher.

Those differences help account for a smaller real income gap than is generally thought during those years. Adjusting for cost of living, Moretti estimates that the increase in the wage premium that one earns because of a college degree is about half what it seems to be when wages are simply compared across the entire U.S. without first adjusting for cost of living. As many professionals in New York or San Francisco can tell you, Moretti’s conclusion is hardly shocking.

Still, the average person might wonder why the heck college grads stream into places where costs eat up so much more of their wages. Prof. Florida would argue that it’s because grads are not only attracted to but willing to pay for the amenities that these areas provide, what New York Times’ columnist David Brooks might call BoBo (bourgeois/bohemian) amenities.

Moretti tests that assumption, however, and finds it wanting. If highly skilled workers are drawn somewhere by local attractions, there should be an abundance (or at least an adequate supply) of talent in these places, which would keep wage increases down. Instead, skilled workers are going where there is already demand for their services—one reason why the wage premium kept increasing over the period he studied, even in places that already had plenty of college grads.

If Moretti’s research is correct, it helps to answer one of the puzzles of the income gap. As the title of Goldin and Katz’s book suggests, the demands that technological changes have created in our workforce have outstripped our educational system’s ability to meet them. The number of college-educated workers hasn’t been growing as quickly as the demand for their skills.

Why, then, haven’t students been seizing the opportunity that seems to be so apparent? There’s plenty of speculation about this—and a lot of blame. Advocacy groups argue we haven’t invested enough in education—though our per-pupil spending in K-through 12 outstrips most other industrialized nations by a good deal. School reformers, meanwhile, have placed some of the blame on our university education schools, who have occasionally favored curricula that are trendy but unproven in our public system. Or maybe it’s just that kids aren’t as motivated as they used to be, even when the payoff seems big.

But Moretti’s research suggests there’s another reason. Maybe kids (or their parents) who are sitting on the fence about attending college understand better than a lot of policy makers that the return produced by a university diploma isn’t all it seems to be, especially if you are a middle-of-the-road student who will have to borrow heavily to get a college degree and then go snare a job that isn’t at the top of the pay scale in a place where it’s expensive to live.

Still, the notion that we should be sending more kids to college is so alluring that President Obama has made it a signature part of his economic revival strategy, and we’re about to embark on another government-sponsored push to get more kids into college and then graduated.

Maybe we should be listening to what the market tells us instead. Labor surveys continue to show that we have enormous demand in this country for skilled trades, which pay their own salary premiums. Our best vocational schools, the ones that serve this market, have exemplary placement records, getting kids good-paying jobs right out of high school or after two years of community college. Yet guidance counselors often de-emphasize vocational training, and in some places per pupil spending in public vocational schools is shockingly low compared to spending within the school system in general. No politician is going to get reelected claiming he helped increase graduation rates at vocational schools. In my home town, they advertise on billboards how many graduating high school seniors are going to college.

But if college isn’t quite the yellow-brick career road that it’s cracked up to be, perhaps it’s time we explore other ways to close the income gap--even though the gap that isn’t quite as large as we thought it was in the first place.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets