Paul Krugman claims that it is just wrong to think that increasing income inequality is largely about education, because much of the income gains have accrued to the very top of the income distribution–the much discussed 1 percent. Instead, he says, increasing inequality is about the growing influence of oligarchs.
I have been puzzled by Paul’s argument. My initial reaction was that it struck me as a non sequitur. Even if the income gains are in the top 1 percent, why does that imply that the right story is not about education?
I then realized that Paul is making an implicit assumption–that the return to education is deterministic. If indeed a year of schooling guaranteed you precisely a 10 percent increase in earnings, then there is no way increasing education by a few years could move you from the middle class to the top 1 percent.
But it may be better to think of the return to education as stochastic. Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.
Let me give you a couple examples. I am comfortably in the top 1 percent. I believe that Paul, with his Princeton professorship, regular Times column, speaking fees, and moderately successful textbook, is there as well. I suspect (although cannot prove) that if he and I had stopped our educations after finishing high school, we would not have been anywhere near where we are in the income distribution. If that is correct, might it be better to think of education as the key rather than focusing on the growing influence of oligarchs?
I am inclined to think that education is important here in part because the large increase in the share of the top 1 percent from the 1970s to the present occurred together with the increase in the rate of return to education during this period documented by labor economists. It is possible, of course, that the the two phenomena just happened to occur simultaneously. But the timing suggests that the two trends–the increasing value of education and the rising share of the top 1 percent–may be related.
written by Gregory Mankiw