Income Inequality and The Cost of Education

What's the value of a good education?

Hard to say in America, where the quality of education is falling faster than the cultural relevance of my refences, but what we can quantify is what's the value of an education.

Let's look at some numbers.

Below is the average weekly income of a high school graduate versus the average income of a college graduate (bachelor's degree any field).

While this only tells half the story, it's a compelling half already. What we can see from this graph is that the average college graduate earns roughly $23,000 per year more than the average high school graduate, and that that gap is widening by about 1% a year.

Whew, that's problematic if you're that guy without a degree.

But wait, it gets worse.

According to this chart that I totally did not make up (with numbers sourced from 11 years of BLS data), there's a roughly 16 point difference in labor force participation, meaning a college graduate is almost 28% more likely to be employed at that higher wage than a high school graduate is at the lower.

What does this say about the cost of education?

Well, if we assume that 18-year-olds behave in an economically rational manner and that unicorns are a thing, we can calculate what's called a "Net Present Value" of a college degree by taking a discounted future return on the increased earnings and probability of earnings to yield a "value" that a rational consumer should be willing to pay for the privilege of being roughly 30% more likely to be employed at a salary roughly $20,000 higher than they would be without it.

Summing up the tedious math of probability weighted present values of future returns, we can safely say that the "value" of a college education in the United States in 2003 was roughly $188,495. Projecting forward at that growing with that 1% annual gap for the next ten years, someone entering college today would rationally be willing to pay over $200,000, and still come out ahead of their diploma-only counterpart.

Now of course this simplifies the equation quite a bit by ignoring the likelihood of dropping out, which is staggeringly high in the US, but even assuming there's only a 50% chance of graduating, $25,000 per year is where tuition should be based off the economic factors.

Not surprising since the average published college tuition for a four year school ranged from $15,130 to $30,094 for the 2013-2014 school year.

Funny how economics works out like that.

Raw Data (Note Q4 '13 was projected from an average of the previous three quarters since data was unavailable at the time of writing)

BLS (Tables5&6 were used) 

Tuition 

Unemployment and Gender

A quick post to follow up a discussion from Google+.

A big factor in labor dynamics over the last four decades has been a shift in demographics.

One of the problems with gender equality is that in many cases it means a woman can do a job just as well as a man. In fact, statistically speaking, roughly 50% of the time, she can do it better.

What this means is that often when a woman joins the workforce, as thankfully they have done in droves over the last half century, they are often replacing a man.

Labor force participation is a zero-sum game, in so far as it has held steady between 56 and 64% since 1976. An unfortunate side effect of this is that men have seen steadily increasing unemployment since for as long as we have reliable data.

As shown in the graph, unemployment among women declined from 1976 to 1997, and plateaued, not rising until the recession of 2009 (Black Arrow), while men had faced rising unemployment at about a quarter point per year, until 2009.

Same chart, Googlified

That being said, from a strictly economic standpoint, any time a woman replaces a less qualified man, society benefits from increased productivity, so we shouldn't exactly be mourning the progressive improvement of American society.

Especially, as the data indicates, we still have a long way to go.

Data used in this analysis were from the United States Bureau of Labor Statistics, specifically Series:
LNS10000000 - Civilian noninstitutional population
LNS11000000 - Civilian labor force
LNS10000001 - Civilian noninstitutional population, male
LNS11000001 - Civilian labor force, male
LNS10000002 - Civilian noninstitutional population, female
LNS11000002 - Civilian labor force, female

Raw data available here.

Effects of Minimum Wage

I've seen a lot of chatter lately regarding raising the federal minimum wage. Some strongly in favor, some strongly opposed.

As always, I have no opinion on the matter, only data.

The three charts below show Minimum Wage (inflation adjusted to 2013 USD) vs. Unemployment (Real Unemployment, not those claiming benefits), a normalization of the two for easier comparison, and finally Minimum Wage vs. GDP growth.

Inflation Adjusted Minimum Wage vs. Unemployment

Inflation Adjusted Minimum Wage vs. Unemployment (Normalized)

Inflation Adjusted Minimum Wage vs. Change in GDP

The results are largely what you'd expect. Raising minimum wage has a measurable but small impact on labor participation. conversely, it has a significant measurable impact on the velocity of money, and hence GDP.

With Trendlines from Excel

The take away is that a healthy economy is not always one in which everyone is employed. In fact, at no point in US history has "employment" exceeded 70% (it wasn't until WWII that it exceeded 50% with the new acceptance of women in the workplace). The notion that everyone should be able to go to work is a modern one, and indeed, apparently false.

If we truly follow the division of labor concept laid out by Adam Smith, there is as much, if not more productivity from a stay-at-home dad than from a father who splits his time between work and home. The decrying of the "housewife" and the emasculation of the husband "unable" to provide for their family are again new societal constructs, and without grounding in economics. People should do what they like, focus on it, and be good at it. Social stigmatization does not increase productivity, any more than yelling at a dog will keep them from soiling the carpet if you don't let them out.

Economics can incent behavior, but only so far, as eventually the marginal utility of further rewards declines to zero, as does the marginal disutility of further punishment.

These wasted resources, incentivizing desired behavior, and discincentivizing undesired or stigmatized are better allocated to production in an ideal world.

As the Department of Labor cautions and I learned to my great cost some years back, "The employer [of an intern] derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;" or in layman's terms, some workers productivity will always be below their wage, no matter how low the wage.

In short the data dictates the economy as a whole benefits most when the most productive members are less encumbered by those acquired most cheaply. This lends support to notions of basic income and the importance of social safety nets, while clearly arguing for a higher minimum wage.

A strong consumer base builds a strong and vibrant economy, but despite what we told little Jenny and Johnny growing up, some people simply should not be neurosurgeons or astrophysicists, or heaven forfend economists, lest they wind up doing more harm than good. (I'm looking at you, Ron Paul).

While everyone thinks they want to lower unemployment, in reality we benefit most by increasing per capita nominal income (the amount you take home) and per capita GDP (the value of those dollars) in equal measure, providing the most productivity and the highest quality of life is the purpose of economics, and we shouldn't let political talking points frame our discussion of the data.

As always, you're welcome to take a look at the data, the methodology, and the sources to come to your own conclusions.