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Finlayson: The Education Wage Premium (Troy Media)

By Jock Finlayson
As published in Troy Media, May 8, 2013

The past two years have witnessed considerable public and media interest in the issue of inequality, as evidenced by the emergence of the “Occupy Wall Street” movement in the United States and its counterparts in several other countries.

Many studies confirm that income inequality has grown in many affluent nations. The trend is especially pronounced in the United States, where the richest 10 per cent of households have almost six times as much income as the bottom 10 per cent. The ratio is lower in Canada, but income disparities have widened here as well. And in many advanced economies a rising share of all income seems to be accruing to the top 1 per cent of earners.

Economic research points to a number of factors that have increased inequality and boosted incomes at the upper end of the distribution: globalization, the impact of technological change, competition from emerging economies, and (until recently) rapid growth of the financial sector. Fast-climbing compensation for chief executives, professional athletes, entertainers, and some successful business owners has also played a role in driving income gains at the very top.

But the most important contributor to greater earnings inequality is increases in what economists refer to as “the education wage premium” – the economic returns to individuals who possess one or more university degrees (or other high-value work-related credentials). Continued growth in the demand for better-educated workers has raised earnings for people in the top 20-25 per cent of the income distribution.

Another phenomenon that has fostered larger gaps in household (as opposed to individual) income is what social scientists refer to as “assortative mating.” This awkward term captures the realty that marriages now increasingly occur among individuals from the same socio-economic strata. Today, people with university degrees are more apt to marry other degree-holders than to wed someone with lesser educational qualifications. Combined with the fact that a large majority of working-age women are now full participants in the labor force, “assortative mating” has significantly accentuated divergences in household income.

Also contributing to greater income inequality are other forces that are affecting the quality of jobs and, arguably, recasting the earnings distribution. One important trend, operating on the “demand side” of the labor market, is employment polarization. Across many advanced economies, more job opportunities are tending to concentrate at the two ends of the skills spectrum: skills-intensive positions that demand high-level cognitive abilities and formal educational credentials, and a plethora of less skilled jobs that offer substantially lower compensation.

American economist David Autor has explored this topic in detail in the U.S. context. Looking at patterns of job creation and employee compensation, he distinguishes three broad groupings of occupations. The first consists of managerial, professional and technical jobs that require several years of post-secondary education and typically pay well above-average wages/salaries. Most households in the top 10 per cent of the income distribution have one and frequently two members who work in these kinds of occupations.

The second group is made up of what Professor Autor refers to as “middle-educated, middle-paid” occupations; these include sales, office, production, and repair occupations along with fabricators and operators. Workers in these fields commonly have some tertiary education, but not usually a full-fledged university degree. In the past, such occupations formed part of the bedrock of the American middle class and provided an important pathway to upward mobility.

A final set of occupations spans a diverse mix of service-related jobs in which employees generally don’t have any formal post-secondary qualifications. Workers in many of these jobs are engaged in performing manual or other “in-person” tasks that can’t easily be replaced with technology, or out-sourced to jurisdictions with lower labor costs. Examples are food preparation, cleaning, home and building maintenance, basic retail services, and a wide range of personal care services.

Professor Autor’s research, supported by other academic studies, shows that job creation differs across the three groups of occupations. Since the 1980s, employment in the U.S. has grown briskly across most managerial, professional and technical occupations, as well as in many relatively lower-skilled service positions. But the picture is different for middle-educated/middle-paid occupations. Here, employment gains have lagged the economy-wide average and actually trended down over time. And these shifts in job creation among occupational groupings are expected to continue for the rest of the decade.

A notable consequence of rising demand for both highly educated workers and less educated workers performing manual or service tasks is a growing polarization of employment opportunities in America. But broadly similar occupational dynamics are unfolding in the Canadian job market. This may well herald a “partial hollowing out” of middle-income employment opportunities over time. If so, this trend can be expected to magnify concerns over income and earnings inequality.