No cheers for equality

An article in this issue of Fortune magazine, "The Poor Get Richer: Blue-collar workers are making salary gains- but don't cheer yet," makes interesting reading. Geoffrey Colvin draws attention to the fact that a new Fed study of family finances indicates that incomes are converging in the U.S. However, he cautions that before we cheer, we must take note that between 2001 and 2004 (the most recent year for which data are available), incomes of the poorest 20% of families increased while incomes of the richest 20% fell. Basically, the poorest families' share of total incomes grew, and the richest families' share shrank.

What could that trend reversal mean? The most obvious explanation seems highly counterintuitive: The skill premium, the extra value of higher education, must have declined after three decades of growing. The Fed researchers didn't pursue that line of thought, but economists Lawrence Mishel and Jared Bernstein at the Economic Policy Institute did, and they found supporting evidence in the new Economic Report of the President, issued within days of the new Fed survey. It cited Census Bureau data showing that the premium had indeed fallen sharply between 2000 and 2004. The real annual earnings of college graduates actually
declined 5.2%, while those of high school graduates, strangely enough, rose 1.6%.

One possible explanation is that outsourcing is impacting the white collar jobs more than it is low skilled jobs in the firm. Perhaps, most of the low skilled jobs that draw interest from high school graduates have already migrated to low cost destinations so that a majority of jobs currently being pursued by high school graduates are those that cannot be easily transferred overseas. Read trucking, construction, etc. However, as firms increasingly outsource strategic capabilities and functions like manufacturing, product design and development, engineering, and R&D, college graduates feel the pinch. And if this trend keeps up, it'll impact incentives for higher education. So, even when the baby boomers retire, we might have to import technological talent to maintain competitiveness.

Hmm, wage equality - good. Lower incentives for education - not good. Like Colvin says, we must be careful what we wish for.