College: The Payoff Shrinks

Grads' real earnings have fallen for four years. Here's why it matters

By Michael J. Mandel in New York

Sometimes what's beneath the surface is more important than what's on top. When the U.S. Census Bureau released the income and poverty numbers for 2004 on Aug. 30, it didn't seem like much had changed. Real income edged down a bit for the second straight year, and the poverty rate got a bit higher.

But after some digging and a few twirls of a spreadsheet, the data in the report verifies what many have feared: The Americans who should be prospering in a knowledge economy -- the college-educated -- are instead taking it on the chin. Real earnings for workers with only a bachelor's degree have fallen for four straight years, for the first time since the 1970s. And the decline -- about 5% since 2000 -- shows no signs of abating.

This is a big deal, economically and politically. For two decades, from 1980 to 2000, pay for college-educated workers marched relentlessly upwards, leaving workers with a mere high school diploma in the dust. Economists wrangled for years about whether this growing "college wage premium," as it was called, was due to technology, or globalization, or something else. But whatever the cause, few questioned that a college education is the route to a good life.

Since 2000, however, the college wage premium has shrunk, because the pay of high school graduates has eroded less than that of college grads. Why? Outsourcing of skilled jobs to China and India is part of the explanation, as millions of their college-educated workers join the global economy. Wages may also be held down by oversupply in the U.S., since the number of college-trained workers here has grown by 32% over the past 10 years, compared with only an 8% rise for all other education levels. Technology may be getting simpler and easier, requiring less education to use. Or the drop in grads' earnings may be a temporary hangover from the tech bust.

So far college-educated workers have given back only a small part of their previous gains. Since 1994 earnings for Americans with a bachelor's degree are up about 10%.

Still, unless the trend of the past four years reverses, the clear benefit of attending college will become tarnished. That could make it a lot harder to persuade students and parents to ante up big bucks for tuition and room and board. Moreover, if the college premium continues to shrink, fewer young people will want to sacrifice to get a degree.

The declining earnings of the college-educated could also change the political landscape. Exit polls after the 2004 Presidential elections suggest that voters with only a college degree went 52% to 46% for George W. Bush over John Kerry. That's a big reason why Bush won -- but the college-educated could be ready for a change by the next election.

Still, it isn't easy for the Democratic Party to adopt policy proposals aimed at helping this group while addressing the concerns of their traditional lower-income constituents. Most safety net programs would not help the college-educated, who make far too much to qualify even with earnings falling. "It's hard to say they're going to turn to old FDR-style activist government," says Stephen Rose, a well-respected labor economist and consultant who recently analyzed which income and occupation groups directly benefit from Democratic programs.


Another complication for the Democrats is their repeated attacks on the budget deficit run up by the Bush Administration. Unfortunately, cutting the deficit would probably involve raising taxes on the top 20% of households, including many with just a college degree.

The best response, for either the Democrats or the Republicans, may be to ignore the deficit and sharply beef up spending on education and research. That would have the economic advantage of investing for long-term growth and competitiveness. And it would have the political advantage of creating jobs at home for college-educated workers who fill teaching and research positions. Doing well by doing good may be the name of the game.

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