The How & Why of Inequality

The NY Times has a review of the book The Race Between Education and Technology by Claudia Goldin and Lawrence F. Katz. Here are some key ideas the reviewer, Stephen Kotkin, has picked from the book:

During the first 70 years of the 20th century, inequality declined and Americans prospered together. Over the last 30 years, by contrast, the United States developed the most unequal distribution of income and wages of any high-income country.

Some analysts see the gulf between the rich and the rest as an incentive for strivers, or as just the way things are. Others see it as having a corrosive effect on people’s faith in the markets and democracy. Still others contend that economic polarization is a root cause of America’s political polarization.

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The authors skillfully demonstrate that for more than a century, and at a steady rate, technological breakthroughs — the mass production system, electricity, computers — have been increasing the demand for ever more educated workers. And, they show, America’s school system met this demand, not with a national policy, but in grassroots fashion, as communities taxed themselves and built schools and colleges.

Beginning in the 1970s, however, the education system failed to keep pace, resulting, Ms. Goldin and Mr. Katz contend, in a sharply unequal nation.

The authors allow that a decline in union membership and in the inflation-adjusted minimum wage also contributed to the shift in who partook of a growing pie. But they rule out the usual suspects — globalization (trade) and high immigration — as significant causes of rising inequality. Amid the current calls to restrict executive compensation, their policy prescription is to have more Americans graduate from college.

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They show that by the 1850s, America’s school enrollment rate already “exceeded that of any other nation.” And this lead held for a long time. By 1960, some 70 percent of Americans graduated from high school — far above the rate in any other country. College graduation rates also rose appreciably.

In the marketplace, such educational attainment was extremely valuable, but it didn’t produce wide economic disparity so long as more people were coming to the job market with education. The wage premium — or differential paid to people with a high school or a college education — fell between 1915 and 1950.

But more recently, high school graduation rates flatlined at around 70 percent. American college attendance rose, though college graduation rates languished. The upshot is that while the average college graduate in 1970 earned 45 percent more than high school graduates, the differential three decades later exceeds 80 percent.

“In the first half of the century,” the authors summarize, “education raced ahead of technology, but later in the century technology raced ahead of educational gains.”