What's Happening To Americans' Income?

Policy Backgrounders | Economy

No. 138
Monday, January 29, 1996
by W. Michael Cox & Beverly J. Fox


The Return to Education: Widening the Income Distribution

Figure V - The Education Premium%3A Index of Income By Educational Attainment%2C 1972 and 1992

One major issue remains: the sharply slower growth in total employee compensation compared with personal income. From 1974 to 1993, the gap between income and compensation widened as total compensation grew at a 0.7 percent rate, compared to 1.4 percent for per capita personal income (see Figure IV). It should be noted that data on wages and compensation pertain only to production and nonsupervisory workers, about 63 percent of the work force, whereas the income data cover all workers. The widening gap tells us that the share of income paid for production and nonsupervisory work is declining, while the share paid to professionals, supervisors, managers and owners is growing.

One explanation for the widening gap appears to be the rising return to human capital. In an information- and service-oriented economy, business capital encompasses not just physical plant and machinery but, to an increasing degree, intellectual capital as well.16 As Figure V shows, the workers reaping most of the economic gains have been those at the higher end of the education spectrum. The income premium to education is substantial and has grown markedly over the past two decades. In 1992, college graduates made an average of 82 percent more than high school graduates, up from only 43 percent more in 1972. The really big returns to education these days come with advanced degrees.

  • In 1972, people with advanced degrees earned 72 percent more than high school graduates.
  • By 1992, those with graduate degrees made 2.5 times more than high school graduates.
  • Today, high school dropouts earn scarcely half as much as high school grads, and the gap is widening.

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