Heavy Lifting - thoughts and web finds by an economist
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Tuesday, January 09, 2007

Why you want to get an education

From the December 1, 2006 San Francisco Federal Reserve Board's Economic Letter concerning economic inequality in the United States:

How to interpret this graph? The base year is 1973, which normalizes the incomes of various levels of education in 1973 to all be 100. Therefore, even if a Ph.D. in 1973 might have earned, $50,000 (in 2003 dollars) whereas a high school drop-out earned $15,000 (in 2003 dollars), in 1973 both wages are scaled to 100. Fast forwarding to the last year of the graph, the normalized incomes of those with an advanced degree are 125% what they were in 1973 whereas the income for those who drop out of high-school has fallen to approximately 80% of what it used to be.

In other words, not only was there disparity between nominal wages across educational attainment in 1973, the real earning power of these different levels of education has also changed over time. Those with more education, i.e., more human capital, are able to take advantage of today's economy whereas those without education seem to be falling behind.

The upshot? If at all possible, an individual should stay in high-school and hopefully get a little college education to increase their human capital. If this doesn't happen, it is likely that the individual will fall behind those who do receive more education, training, and human capital.

Can public policy address this issue? Perhaps financial aid and other incentives might help. Others might suggest there should be more disincentives to dropping out of school. Yet, the market is already punishing those who do not increase their human capital when it is easiest to do so, i.e., when you are young. Perhaps the problem is more a lack of information than a lack of incentives/disincentives. If an individual doesn't know how a decision today is expected to influence earning power 10 or 20 years from now, is it all that surprising when bad decisions are made?

Graphs like this can sometimes provide more information than obtained from the slogans and programs of various governments. Perhaps more graphs like this, presented in conspicuous places with simple explanations, could help people make better informed decisions about their life.

Be cool, stay in school.

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