Education and income

Carpe Diem is one of my favorite econ blogs. In part, because he always seems to be able to find the kind of data that I search for without success.

Today, he posted a graph from the Brookings Institute (generally considered an organization of the left). The x-axis is the year, the y-axis is income. On the chart are 4 different segments of the population: 1) no high school diploma, 2) high school diploma, 3) college diploma, 4) advanced degree.

Here's the graph:

What is really astonishing is that people who only have a high school diploma or less, have seen their incomes remain stable or drop (I'm assuming that the data is inflation-adjusted, but I don't see anywhere in the original Brookings' document any statement of this--a major omission, if you ask me.) (Steve says: It says "2004 dollars" on the graph, so it looks like inflation is accounted for.)

Another undeclared element is whether government benefits and subsidies are counted towards the "income" statistics. Does the data reflect the receipt of food stamps or Section 8 housing assistance? If you look at 1997 on the graph, the year welfare reform was enacted, the income of both the high school drop outs and those with a high school diploma continued to rise until around 2000. One of the key components of the reform was to limit life-time welfare benefits to just 5 years. So, reform enacted in 1997 would start hitting hard in 2002, as people were kicked off the welfare rolls for overstaying their welcome.

To me, this should mean that after that point we should see incomes rising, as more people leave welfare for work. Unfortunately, that is not what the data show.

However, there were rather a lot of other factors which would have affected the income of most people: 1) the end of the tech boom eliminated a large source of capital in the economy, 2) the end of the tech boom cause a slight downturn in the economy, 3) the downturn was exacerbated by the events of September 11, 2001.

I would suggest that these factors account for the decline in incomes from 2000 onwards, since those declines were across all educational levels. PhDs' income fell as well, as college graduates, as well as high school graduates. Those are people who were unlikely to have been thrown off of welfare.

However, the declines in income at the lower education levels began in the early 70's in the case of the poorly-educated, and in the early 80's for the high school graduates.

The decline of manufacturing employment and the rise of economic output first in Japan, and more lately in China and India may account for much of the decline. More international competition hits the lowest incomes the most.

It would be interesting to see the income graph combined with two other graphs: that of union membership (as a proxy for low-skilled employment) and legal/illegal immigration (since competition for low-skilled jobs has increased with the increasing levels of immigration--thus driving down wages.)

In the end, it is probably all of these factors and more that have caused these incomes to fall. (Including the overall decline of standards in education. A diploma just isn't worth much any more, since people seem to be able to get them who barely know how to read.)