Income inequality in the United States grew substantially during the 1970s and 1980s, mainly because of higher returns on education, training and experience. During this period:

• The gap between the weekly earnings of college graduates and high school graduates widened from 40 percent to 70 percent.

• The gap between earnings of high school graduates and high school dropouts widened to more than 40 percent.

The gaps widened because companies competing for skilled workers bid up their pay compared with the wages of less skilled workers. When income inequality is due to higher rates of return on human capital and other investments in knowledge, it can drive an economy toward more rapid economic growth.

The widening income gap increases the incentives for young people to invest in their education. People are responding to those incentives:

• The high school graduation rates of blacks in the U.S. have risen substantially since the late 1970s to near that of white students.

• Despite the rapid increase in college tuition since 1980, the fraction of male high school graduates who continued their education grew by several percentage points, while college enrollment rates of women expanded even more rapidly.

Unfortunately, the higher returns on human capital have been associated with deteriorating earnings for persons at the bottom of the economic ladder. Real earnings of high school dropouts and others with few skills not only declined relative to more educated and trained employees but also fell significantly in absolute terms.

Source: Gary S. Becker, "Maybe the Earnings Gap Isn't Such a Bad Thing," Business Week, February 6, 1995.

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