Is Education the Answer to Income Inequality?

Education is a good thing – just don’t expect it to solve the problem of rising income inequality anytime soon.

By Lars Osberg

There are many ‘non-economic’ reasons to be in favor of improved education – not least of which is the impact of education on quality of life. But is education the answer to income inequality?

Since the early 1980s, middle class incomes in the U.S. have stagnated while the incomes of the top 1 percent have, with occasional short interruptions, grown dramatically. As a result, the top 1 percent income share increased from 10.8 percent of total income in 1982 to 22.5 percent in 2012. As Figure 1 below illustrates, if the growth rates of the past 30 years continue, the result will be ever greater widening of America’s income gap.

It has long been fashionable to assert that improved education is the answer to our growing inequality problem. But even if increasing educational attainment reduced inequality of opportunity between the disadvantaged and the middle class – and reduced wage differentials within the middle class – this does not imply an acceleration of the rate of average income growth of the bottom 99 percent.

Figure 1. Historical and projected real income in United States, 1984-2032

(Median Household and average income of the Top 1%, real income in US 2012 dollars)

 

Educational initiatives are notorious for long time lags. Even an all-powerful leader with a magic wand that could instantaneously revolutionize primary and secondary education in 2015 would have to wait 12 years to see, in 2027, the full impact of this policy on high school graduates. [pullquote] Educational initiatives are notorious for long time lags. [/pullquote] To improve education over current levels, some post-secondary education would then be needed, pushing graduation back to 2031 or later – by which time the income gaps projected in Figure 1 would already have fully emerged.

Even then, aggregate impacts would initially be small, because the flow of new graduates entering the workforce each year is only about 1/40^th of the workforce, and the impact on average labor force skills is the differential between the skills of entering and retiring cohorts. It would be roughly another twenty years before new entrants were the majority of workers (i.e. around 2051, or about 36 years after the change).

Furthermore, since most people have completed their education by their mid-twenties, a focus on “solving” the inequality problem through improved education essentially means writing off older generations – i.e. anyone now over 30, which is most of the population.

Canada’s experience offers a guide to whether an expansion of education can really be expected to solve the inequality problem. For the age group 25-64, Canada’s tertiary education attainment level (51 percent in 2010) substantially exceeds that of the United States (42 percent).[1] [pullquote] In Canada, improved education has not produced greater income inequality. [/pullquote]

Canada’s investment in education has been a “good thing” for many reasons, but it has not prevented the stagnation of median household incomes in Canada and has not produced greater income equality.

Education is a good thing – just don’t expect it to solve the problem of rising income inequality anytime soon.

[1]. For the 25-34 age cohort, Canada had 56 percent, the U.S. had 42 percent. See Table A1.3a. Population that has attained tertiary education (2010), OECD 2012a.

Lars Osberg is a Professor in the Department of Economics at Dalhousie University.