Academic journal article Economic Perspectives

The Economic Value of Education by Race and Ethnicity

Academic journal article Economic Perspectives

The Economic Value of Education by Race and Ethnicity

Article excerpt

Introduction and summary

From 1980 to 2004, real average hourly wages grew from $14.47 to $17.51, an increase of 21 percent. (1) However, this increase in average hourly wages over 25 years masks important differences in wage growth for low- and high-wage workers, as well as differences in growth rates over time. Notably, many people became concerned about rising wage inequality over the 1980s; their concerns were driven in part by declines in real wages at the bottom of the wage distribution. (2) Between 1980 and 1990, wages at the 10th and 50th percentiles fell by 7.3 and 1.7 percentage points, respectively, compared with real wage growth of 6.4 percentage points at the 90th percentile. (3) This increase in inequality and falling real wages in the bottom half of the distribution led many politicians and poticymakers to consider several policies aimed at improving earnings among low-wage workers, including increasing the minimum wage and expanding the earned income tax credit. In addition, because higher wages are associated with more years of schooling, many argued in favor of education and training programs to boost wages of the lowest-skilled workers.

One of the best documented relationships in the United States and around the world is that more years of schooling is associated with higher average income and wages. In 2004, high school graduates earned an average of $14.31 per hour compared with $11.12 per hour for high school dropouts--an advantage of nearly 30 percent. (4) As shown in figure 1, because more education is associated with more hours worked per year, the annual earnings advantages of more education are even larger and have increased over the past 25 years. High school graduates outearn high school dropouts on an annual basis by 75 percent in 2003, up from 47 percent in 1979. Similarly, individuals with at least a bachelor's degree earn, on average, 2.3 times the annual earnings of an individual with only a high school diploma or equivalency degree, compared with an earnings advantage of 77 percent in 1979.

Economists measure the economic value of additional schooling ("the return to schooling") as the average percentage increase in mean earnings for an additional year of schooling. Current estimates based on Current Population Survey (CPS) data suggest that for each additional year of completed schooling, an individual's earnings increase, on average, by roughly 11 percent. (5) Indeed, the widely held understanding that more education leads to higher wages has compelled many researchers and policymakers to argue in favor of education and training policies to bolster the wages of the lowest-skilled workers and to reduce income inequality (Carneiro and Heckman, 2003; Krueger, 2003).

Much less is known, however, about how the estimated returns to schooling vary across the population. Just as wages may fall at the bottom of the wage distribution while rising at the top of the distribution, estimated returns to schooling may differ across subgroups of the population. Some researchers find that the return to education is higher for more able individuals (for example, Cameiro, Heckman, and Vytlacil, 2003; Taber, 2001). Others find no consistent evidence that the returns to schooling are higher for individuals that come from more advantaged families (for example, Altonji and Dunn, 1996; Ashenfelter and Rouse, 2000), and in fact, they provide some evidence that the return may be higher for more disadvantaged individuals (Ashenfelter and Rouse, 2000). And yet, much social policy hinges on what we believe to be the value of education for individuals. In particular, policies aimed at increasing incomes of the lowest-skilled members of society by increasing their education will not either improve their economic well-being or decrease inequality if their returns to schooling are low.

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In this article, we provide further evidence on the variation in returns to schooling in the population by examining whether the benefits vary by race and ethnicity of the individual. …

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