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Universities and Income Equality: New Evidence and Conjectures

I am working on a manuscript on American higher education, and in the course of doing so I am doing some work on the role that universities play in achieving the American Dream—of enhancing upward income mobility between generations, for example. If government support of universities is perceived to be a way of reducing income inequality by letting more relatively low-income persons (e.g., Pell Grant recipients, attendees at low-cost state subsidized schools) to obtain a ticket to potential occupational and financial success, we should see some evidence of that in statistics on income distribution.

We did for a while, but not in recent years. For example, from 1945 to 1970, college enrollments and degree attainment soared (over 10 percent of adults having 4 year degrees by 1970), and measured income inequality (using the Gini ratio) fell noticeably. Higher education seemed to be helping to fulfill egalitarian objectives. Since 1970, however, college attainment has risen in some absolute sense even more rapidly—yet measured income equality has sharply declined.

Could it be that when college education is limited to a small segment of society, expanding it will lower Gini coefficients, making income more equal, but if college becomes pretty widespread, further expansion of it loses its egalitarian flavor and, indeed, starts to worsen income equality? In short, I am asking, does a relationship like the curve below exist?

Looking at cross sectional evidence, namely the 50 states plus D.C., we get evidence supporting the existence of the curve above. First, using regression analysis that controls for some other possible causes of inequality using 2000 Census data, we find that states with high proportions of college graduates on average had also higher amounts of income inequality—more college education was associated with greater disparities between rich and poor. Yet doing the same sort of analysis using the 1970 Census, when only a small proportion of adults had degrees, gives the opposite results: The states with high proportions of college graduates had less income inequality—more “college intensive” states had more equal income distributions.

A bit more sophisticated evidence using the 2000 census data (directly econometrically estimating a non-linear curve like in the graph) also is highly consistent with the curve above. That evidence would suggest the equality maximizing proportion of adult college grads is well below the 30 percent or so we have today. If this is true, “progressives” who are concerned with income equality should oppose efforts such as that of President Obama to expand the proportion of college graduates dramatically.

Why might these results exist? I suspect the law of diminishing returns is at work yet again. When college attendance/graduation is relatively rare, expanding it does bring in a number of able students who graduate and become productive members of the labor force, significantly increasing incomes of persons otherwise not likely to earn as much. But when the proportion of adults gets large and there is a growing disconnect between the pool of graduates and the pool of high paying technical, managerial, and professional jobs, the incremental graduates do not fare as well economically. More of the incremental students are also more ordinary, less able, less bright.

Moreover, as Lowell Gallaway reminds me, this applies on the faculty side as well—we get more and more faculty who are no longer the “best and brightest” in society, as was often the case decades ago.

Today, a degree from a middling quality state school is not typically a ticket to a top or even moderately high-paying job. Yet that is NOT the case for graduates of elite top schools, who have the characteristics more generally found in the earlier era—bright, motivated, disciplined—good potential employees. Thus applications for admission are soaring at the Harvards, Stanfords, Northwesterns and Williams of the world, but typically showing little growth at the non-competitive state schools.

A new elite class has arisen of the Uber College Graduate, the ones from the right schools, creating a sort of quasi-academic aristocracy that is the antithesis of egalitarian thinking. Harvard used to have students who were pretty ordinary—not all that much more brilliant and accomplished than those going to, say, Boston College or even Northeastern University (to put it in a Boston context). That has all changed, and it is starting to show up in income statistics.

This evidence needs more analysis by others, using new data sources, techniques of investigation, etc. But as I read the evidence I have seen to date, the egalitarian justification for government funding of schools and students has taken another hit.

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