NCPA - National Center for Policy Analysis


March 3, 2010

Why is economic inequality growing, asks N. Gregory Mankiw, a professor of economics at Harvard University.  The best diagnosis so far comes from Claudia Goldin and Lawrence F. Katz in their recent book, "The Race Between Education and Technology."  Their bottom line is that "the sharp rise in inequality was largely due to an educational slowdown." 

According to Goldin and Katz: 

  • For the past century technological progress has been a steady force not only increasing average living standards, but also increasing the demand for skilled workers relative to unskilled workers.
  • Skilled workers are needed to apply and manage new technologies, while less skilled workers are more likely to become obsolete.
  • For much of the 20th century, however, skill-biased technological change was outpaced by advances in educational attainment.  

In other words, says Mankiw, while technological progress increased the demand for skilled workers, our educational system increased the supply of them even faster.  As a result, skilled workers did not benefit disproportionately from economic growth.  

But recently things have changed.  Over the last several decades, technological advance has kept up its pace, while educational advancement has slowed down, says Mankiw: 

  • The cohort of workers born in 1950 averaged 4.67 more years of schooling than the cohort born in 1900, representing an increase of 0.93 years of schooling in each decade.
  • By contrast, the cohort born in 1975 had only 0.74 more years of schooling than that born in 1950, an increase of only 0.30 years per decade.
  • That is, the pace of educational advance has fallen by 68 percent. 

Because growth in the supply of skilled workers has slowed, their wages have grown relative to those of the unskilled.  This is evident in Goldin and Katz's estimates of the financial return to education, says Mankiw: 

  • In 1980, each year of college raised a person's wage by 7.6 percent.
  • In 2005, each year of college yielded an additional 12.9 percent.
  • Over this time period, the rate of return from each year of graduate school has risen even more -- from 7.3 to 14.2 percent. 

Source: N. Gregory Mankiw, "Spreading the Wealth Around: Reflections Inspired by Joe the Plumber,"  Harvard University, February 2010.


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