How much would increasing top income tax rates reduce inequality? Good question.

Last week, William Gale, Melissa Kearney, and Peter Orszag (henceforward “GKO”), all of the Brookings Institution, published the result of a simulation ostensibly showing that increasing top-bracket ordinary income tax rates would have little impact on inequality. Unfortunately, their negative conclusion arises more or less automatically from the measures of inequality they report, which do not capture variation in inequality in the tails of the income distribution very well. This morning, John Quiggin made that point, which I expand on below.

The specific scenarios GKO model are increasing the top marginal tax bracket from its current 39.6% to either 45% or 50% and rebating the revenues to low-income households. Their primary analysis simply quantifies the mechanical effect of this policy on income inequality, assuming no behavioral response to tax changes. In this discussion, I confine my attention to the effect of the tax increases on tail inequality and do not discuss the issue of redistribution.

There are two key reasons why these tax scenarios do not affect inequality very much. First of all, the rich earn a great deal of their income in categories other than “ordinary income,” to which these tax rates apply. Those categories are grouped under the somewhat-misleading heading “capital gains,” though tax advisors are skilled at re-categorizing many things to fit the broad definition. This is the nature of the controversy over the “Carried Interest Loophole,” a tax shelter available to employees of Private Equity, Venture Capital, and Hedge Funds—meaning that the beneficiaries of that loophole, who increasingly comprise the top 1% and top 0.1%, would be significantly shielded from the GKO scenarios. News stories in recent years have focused on the low effective tax rates paid by Mitt Romney and Warren Buffett, precisely because those very high-income individuals avail themselves of those loopholes. By looking only at tax rates on ordinary income, the Brookings scenarios ignore them.

The other reason why this scenario doesn’t do much for inequality is that GKO measure inequality by the Gini Coefficient. But the scenarios only affect individuals comfortably within the top 1% of the income distribution. The top tax bracket kicks in at taxable income of $457,601 for married couples filing jointly, which is above the threshold for the top 1% of the taxable income distribution. The Gini Coefficient is insensitive to measuring inequality in that group. That is why Thomas Piketty and his many collaborators on the World Top Incomes Database focus on measured top income shares. Other measures of inequality that GKO consider, like the ratio of 99^th to 50^th percentile income, are also inadequate for the same reasons. Indeed, one of the authors, Orszag, conceded as much on Twitter, and Lucas Goodman, a graduate student who worked on the analysis, made a similar point on his personal blog as well.

Using data that Goodman kindly provided to my colleague Ben Zipperer, it’s possible to estimate what happens to inequality as measured by the top 1% income share under GKO’s scenario. Goodman reported the Gini Coefficients in GKO’s after-tax income data for both the bottom 99% of the distribution and for the distribution as a whole, either under current tax law or under the GKO scenario of increasing the top bracket rate to 50%. Using the formula for converting partial distribution Gini Coefficients to top income shares derived by Alvaredo (2011), it appears that the policy would reduce the top income share in GKO’s data (after-tax income distribution of tax units) by about one percentage point. That drop is actually quite substantial. The context is not precisely the same, but for comparison, the Congressional Budget Office estimates that the after-tax income share for the top 1% of households increased by a total of 5.2 percentage points between 1979 and 2011, so the reduction in the top 1% income share as a result of the GKO scenario is just under 20% of the total increase in inequality over the whole period the CBO analyzes—a much more substantial impact than the one highlighted by GKO.

GKO are continuing a debate that played out this past year concerning policies that would combat income inequality and wage stagnation. At a public appearance sponsored by the Hamilton Institute in February, Lawrence Summers said that focusing on education is a distraction from the challenge facing workers, which is that “there aren’t enough jobs.” The following month, he, Kearney, and Bradley Hershbein published an analysis that argued that a 10% increase in the share of men with college degrees would not substantially impact tail inequality. John Schmitt and I commented on that analysis here, and the authors responded here. All of us agreed with the conclusion that dramatically expanding higher education attainment would not affect inequality very much because it wouldn’t impact the tail of the income distribution. Now, in essence, GKO are saying “well, sure, education wouldn’t affect tail inequality, but neither would higher taxes on the rich,” and they’ve constructed a scenario and employed ill-fitting metrics to support that rhetorical move.

A final word about behavioral responses: the most important research on the effect of top marginal tax rates on the behavior of those liable to pay them is the recent paper by Piketty and his coauthors Emmanuel Saez and Stefanie Stantcheva (henceforward “PSS”), which my colleague Nick Bunker summarized here, and which I discussed before here. The paper describes three elasticities by which top tax rates affect economic behavior. Aside from the classic “supply-side” elasticity, which conjectures that people work less when they’re taxed more, there are two additional responses. PSS’s second elasticity (not original to their paper) is the re-categorization of labor income as capital gains or some other tax-preferred category, and their third elasticity (which is their original contribution) is that in response to higher taxes, rich individuals face a diminished incentive to bargain for a share of the corporate pie.

If the scenarios GKO model were in fact implemented with no other changes, top-bracket taxpayers would enjoy an even larger incentive to re-categorize their income as capital gains than they already do, limiting the ability of such rate changes alone to affect inequality without also tightening up the loopholes available to the rich. On the other hand, they would also have less reason to bargain hard in wage negotiations, which would increase the effect of such a policy on inequality. PSS provide evidence that the third elasticity is more important in explaining behavior than the second. Furthermore, they show that declines in top marginal tax rates across countries are the primary driver of rising tail inequality, implying that a reversal of that policy would have the opposite effect. These questions are far from settled in the literature, so future discussion of the effect of top tax rates and the tax system more broadly on inequality should aim at confirming or disproving the arguments in PSS, not on scoring rhetorical points.

Monetary Policy and Inequality

At the Institute for New Economic Thinking’s highly interesting conference today on “Finance and Society,” Esther George, the President of the Federal Reserve Bank of Kansas City, and Claudia Buch, Deputy President of the German Bundesbank, both rejected the notion that monetary policy should aim to reduce inequality. Both forthrightly stated the mandates of their respective policy-making institutions: in George’s case, the Fed’s dual mandate of price stability and economic growth, and in Buch’s, the notorious European single mandate of “inflation close to but not above 2 percent.”

In flatly rejecting a role for monetary policy in dealing with economic inequality, the two seemed to be hinting at disagreement with Janet Yellen, who gave a widely-touted speech on inequality in the autumn in which she said it “greatly concerned” her. Earlier at the INET conference, Yellen spoke broadly about the role of financial regulation in both the economy and society. To be sure, Yellen has never advocated expressly that reducing inequality be adopted into the mandate of the Federal Reserve. But nonetheless, George and Buch indicated that any wider consideration of the impact of their policy-making beyond the mandates they’re each bound to follow amounts to stepping out of line and into the realm of politics or public debate.

There are two problems with George and Buch’s point of view: first of all, even if they don’t want to admit it, monetary policy mandates already do intimately affect the distribution of wealth and income. And second, there’s some evidence that rising inequality is itself an important contributing factor to credit cycles, which have been the cause of macroeconomic volatility, most notably in the 2008 Financial Crisis. So macroeconomic policy makers will have to come to grips with the empirical reality of the policy environment they confront, which intimately involves inequality

The central bank mandates of price stability and economic growth already step into the realm of the income and wealth distribution. Quite simply, inflation harms creditors, who tend to be rich, and benefits debtors, who tend to be poor, while unemployment disproportionately harms the poor. (Whether it benefits the rich is a far more contentious question for another day.) It may be convenient to proclaim that inequality is unrelated to monetary policy, but the fact is that the two are closely linked.And proceeding as though monetary policy can be made without reference to inequality only serves to exacerbate inequality and possibly undermine explicit central banking mandates.

I’ve created a few charts illustrating the relationship between different measures of the unemployment rate in the US and growth in labor income across the distribution of labor income. The data on the latter were created by my colleague Carter Price, who combined the Current Population Survey (which is top-coded, and hence is only accurate up to the 95^th-98^th percentile, depending on how income is calculated) with the World Top Incomes Database (assembled from tax data, which is very informative about the rich but pools the entire bottom 90% of the income distribution together).

Figure 1: The CDFs of US Labor Income illustrate both the rise in tail inequality and the increasing share of the working-age population that earns zero income from labor. Between 1990 and 2000, the distribution improved for everyone. Between 2000 and 2012, it got worse for everyone except the very top. At least by this measure, everyone in the bottom 70% was worse off in 2012 than in 1990.

Figures 2-4 plot the “predicted” percentage deviation in labor income at a given earnings percentile from its mean over 1990-2012 as a function of either the civilian unemployment rate or the U6 rate, which is a broader measure of unemployment and under-employment that takes workers forced into part-time work and marginally attached to the labor market into account.

The key finding is that the bottom half of the labor income distribution depends a great deal on low unemployment to secure income gains. Hence, prolonged, slack labor markets are bound to worsen inequality. And insofar as monetary policy-makers have it in their power to bring about full employment, or prevent it from occurring by prioritizing other policy objectives like price stability and seeking any excuse available to curtail monetary stimulus, they are choosing to increase inequality.

Figure 2: The predicted percentage deviation of labor income from its 1990-2012 mean, by percentile, as a function of the civilian unemployment rate. The prediction is the result of a regression of labor income by percentile on a polynomial in the unemployment rate.

Figure 3: This figure is the same concept as Figure 2, but with a different set of income percentiles reported.

 

Figure 4: The same pattern holds when U6 is used instead of the core unemployment rate.

Does the Marginal Elasticity of Substitution Have an Ideology?

In my column at The Week, I noted that Capital in the 21st Century argues capital accumulation threatens higher inequality by increasing capital's share of income. And even if capital's share of income doesn't rise due to capital accumulation, as Matt Rognlie and other critics have highlighted, that would be because additional capital is useless. Hardly an argument for making accumulation a policy priority.

In response, Rognlie repeated something he's said before: that a left-wing ideological commitment to a high elasticity reverses the historical valence. In the past, lefties generally highlighted low estimates, precisely because they invalidate arguments in favor of a tax preference for capital.

This morning it occurred to me that this change is more significant than simply an inconsistency in the ideological time series. Specifically: the main contribution of Capital in the 21st Century to economics as a field, beyond the superlative empirical (and some theoretical) work Piketty's done in his papers, is the unification of inequality with macro. This is something that Branko Milanovic has pointed out, in his initial review of C21 and many times since on his blog. If all we had was a representative agent and inequality is completely unmodeled, then estimates of the Marginal Elasticity of Substitution are all that matter for even hinting at the impact of macroeconomics on inequality and assessing policy proposals like a tax preference for capital.

But if we get to bring inequality out into the open, then we can set up what I've come to call the Piketty Puzzle: the best estimates of the Marginal Elasticity of Substitution, interpreted as an actual parameter in production, are that it is less than one. But historically, the capital-output ratio and capital's share of income move together, with the latter driving inequality dynamics.* The adjustment of the price of capital to its quantity dynamics is less than one-for-one. And I personally think it's highly unlikely that the rentier will be euthanized any time soon. As my friend, the brilliant Mike Konczal, said, is it really likely that in 30 years, the wealthy will all be lamenting how poor they are now that their wealth has become worthless?

*As Piketty and almost everyone in the IGM poll pointed out, inequality in the US to date has been driven anomalously by inequality in labor incomes. More on that in future posts. (And in past ones.)

So what resolves the Piketty Puzzle? My guess: simply, that macroeconomics based on pricing factors of production according to the representative firm's first order conditions isn't a very good model of reality. Whether we call it K or W, capital or wealth, whatever, as the pile grows, its value grows too. And since wealthy people own the pile, as it grows, inequality increases.

So, among other things, we need a new macroeconomics that doesn't start with first order conditions (even if it does continue on from there). We need to abandon them entirely and get comfortable talking about and modeling power.

Consumption Taxes Are Not a Good Idea

I have a tax day piece in The Week making that point. To elaborate: the theoretical economic argument for taxing consumption and/or exempting saving from personal income taxation is that full-income taxation penalizes savers by taxing them twice (the first time they earned the money, and the second time they received an income from accumulated capital), while economic growth depends on expanding the capital stock through saving. There is a wide range of economic models that are based on one or both of these two essential ideas. They have nothing to do with reality, and Mike Konczal demolishes them here.

It's pretty clear there's a value judgment going on here, against "irresponsible" people who don't save. It's evident from this blog post by AQR Capital Management Professor of Finance John Cochrane, in which he compares his “thrifty poor” in-laws to Michael Jackson, with his $100 million amusement park and petting zoo. 

 

Finally, on the policy side, doing social policy through the tax code, with a proliferation of tax-sheltered savings accounts for retirement, healthcare, college tuition, etc, 1. hasn't worked as policy in each  of those cases, and 2. contributes a great deal to rising inequality. I also think the policy-making paradigm that says that sort of thing is better than, you know, actually taxing people to pay for programs that do these things, is premised on a kind of economics ideology. Supposedly it's better if people freely choose to save for retirement than if they're forced to do so via Social Security. It's a major case of making policy on the basis of economics-esque "free market" philosophizing, rather than empirical reality, and if we're going to have good policy (or go back to having good policy) in this country the economists are going to have to be the ones to point out where this thinking goes off the rails.

 

A Tiny Addition to Mullainathan on Rent-Seeking in Finance

Sendhil Mullainathan has a nice piece in the Upshot on the mixed feelings he has about the popularity of financial careers among undergraduates at elite universities, especially among economics majors. I feel the same way, and as far as I can tell from my Facebook feed full of econ grad students and junior professors, Mullainathan's piece hit a chord in at least some precincts of the field.

But I want to add one thing to Mullainathan's list of the ways in which the finance industry makes money without serving the public interest, or in fact through actively harming it. And that is by financing payouts to shareholders. JW Mason's paper on this is a must-read. As Mason put it, finance was once a way of getting money into firms. Now it's a way of getting money out, into the hands of shareholders, who are overwhelmingly the already-wealthy. The more time I spend on inequality, the more important I think this dynamic is and the more obvious it becomes that this is the opposite of a functioning free market.

Why has income inequality increased in the last four decades in the United States?

This is an informal, unscientific, open-ended survey. I want to know what economists currently believe to be the answer to the title question. Please leave an answer in comments. If the phenomenon is multi-causal, feel free to elaborate, but I'm not looking for a survey of all the causes, just the ones that you believe to be correct.

I will not express an opinion myself, nor will I reply to anyone generous enough to leave their own. You may also reply pseudonymously, but since this is intended as a survey of economists, please indicate if you are one should you not give your name.

The End of One Big Inflation and the Beginning of One Big Myth

I recently had a short back-and-forth with Noah Smith on the subject of Tom Sargent's article "The Ends of Four Big Inflations," in which I called it "terrible history and questionable economics." The article recounts the post-World-War-I monetary histories of Austria, Hungary, Poland, and Germany, which they all experienced hyperinflations, on the one hand, and Czechoslovakia, which did not, on the other.

That article isn't widely read by academic economists now because its historical, anecdotal approach is out of fashion, for good reasons and bad. But it is nonetheless highly influential. It and others of Sargent's publications form a sort of backdrop to debates about monetary policy that I would argue still have a substantial influence on the way economists imagine the world to work, and certainly in what they teach undergraduates.

The most fundamental problem with that article is that the titular Four Big Inflations were actually one big inflation, and that big inflation was caused by the near-state-collapse embodied in the Treaties of Versailles, St. Germain-en-Laye, and Trianon. In addition to denuding the defeated Central powers of a huge amount of territory, armaments, and industrial capability through direct transfers to the victorious Allies, they imposed reparations on the losers way beyond their economies' capacities. The classic ex-ante study of this is The Economic Consequences of the Peace, by J. M. Keynes, which holds up remarkably well (as does *almost* everything he wrote), notwithstanding revisionist historiography that has questioned Keynes' contention that Germany in particular was capable of financing reparations on such a vast scale. The revisionism is grossly teleological: it takes the eventual Nazi takeover as its starting point in an attempt to show that it could have been prevented if only the Allies hadn't been suckered by the Long Appeasement.

In economic terms, Keynes' argument is that the reparations in the Treaty of Versailles exceeded what modern economists would call the Laffer Peak: the maximum amount of government revenue that can be extracted from the productive economy using distortionary taxation. In political terms, Keynes was outraged that David Lloyd George and, in particular, Georges Clemenceau, discredited by the supremely costly victory they imposed on their own citizens, sought to use the treaty to salvage their own political lives by shifting the ruinous cost to the defeated enemy. To do so, they successfully outmaneuvered an out-of-his-league, politically weakened President Woodrow Wilson. A particularly important aspect of Keynes' argument is the tension between France and Poland's abject public finances, only made paper-solvent by ambitious reparations schedules and hence a productive postwar German economy with a large tax base, and the political impetus to simply steal Germany's entire mining, railway, shipping, and manufacturing capacity and give it to France. Keynes convincingly argued that either way, there just wasn't enough German capital or German workers willing to toil in order to save Clemenceau's reputation with his fellow Frenchmen.

In normal times, public finance had two sources of income: taxes and borrowing. And also in normal times, borrowing is a commitment to future taxation. In a crisis, on the other hand, there are two more: capital levies (basically taking private wealth for public use), and seignorage, which is printing paper money and using it to buy goods and services. For very good reasons, democratic governments that do not face existential threats to their continuity do not engage in the latter two strategies. They both victimize the citizenry to save the regime. Thus, they only become feasible in an environment of threatened or actual political collapse, where the citizenry faces a greater potential victimization from without, or in any case, from some source other than the existing government.

The defeated Central powers engaged in all four strategies for obtaining revenue, and it wasn't sufficient to satisfy their reparations obligations. A word about Sargent's other three supposed hyperinflations, apart from Germany: Austria and Hungary did lose a huge portion of their tax bases in the war, but they never really had a definite reparations schedule, and their hyperinflations ended when the vague commitment to reparations imposed on them was removed by the League of Nations. Poland of course did not exist until the Treaty of Versailles and in one of his most memorable passages from that book, Keynes asserts that it could never have existed but for the Treaty of Versailles, since its finances were premised on German reparations. He writes "Unless her neighbors are prosperous and orderly, Poland is an economic impossibility with no industry but Jew-baiting."

The German hyperinflation was a consequence of the postwar settlement, and most importantly, the huge reparations it faced with a much-depleted tax base.Throughout the period 1919-1924, the Weimar Republic was continuously de-stabilized by turbulent internal politics. But the hyperinflation was a creature of Allied insistence on reparations. It peaked disastrously in 1923 after France invaded the Ruhr industrial region to foreclose on reparations, and it ended with the publication of the Dawes Plan providing the Weimar Republic an international loan and a delayed reparations payment schedule.

Sargent tells a very different story. Each of his four hyperinflations ends when a central bank is reorganized to be politically independent of a national treasury. Thereafter, although the circulation of national currency continued to increase, inflation was kept under control because newly-independent central banks adhered to reserve requirements and only purchased securities on the open market, rather than accepting worthless government bonds from the Treasury. At the same time, national treasuries were disciplined by their lack of access to the money-printing presses to enforce fiscal austerity. That combination of institutional changes constitutes what Sargent calls a "regime shift." The whole point of his article is that specific economic policies (e.g., printing money) can have different effects (hyperinflation vs. not) under different regimes because private agents have different expectations about future government behavior. In the former case, government bonds forced on the central bank will only be repaid with more money printing, while in the latter case, governments will raise revenue or reduce spending in order to finance their debt over the long run.

The notion of a regime change might be helpful, but Sargent seriously mis-deploys it here (which, after all, is the paper that invented the concept to my knowledge). There was a regime shift: the Allies decided that if the Weimar Republic were allowed to fail, the result would be catastrophic. More specifically, the US and Britain (whose policy changed by the replacement of Lloyd George in 1922 and the decline of the Liberal Party) prevailed over France and abandoned the most onerous aspects of the postwar settlement.

Before turning to the later intellectual history following Sargent, let's consider his "control" case of Czechoslovakia. Czechoslovakia was also created at the Treaty of Versailles Saint Germain-en-Laye, but unlike Poland, it was well-endowed with the most productive territory of the former Austria-Hungary. As a perceived victim of the war, it never had to pay reparations, and unlike Poland its financial health was neither dependent on those reparations being paid by anyone else, nor did it have to fight wars with its neighbors to survive (which Poland did with the Soviet Union from 1919-1921). On the contrary, since Czechoslovakia was essentially created to be a French ally, the only conceivable threat would be from Germany, and Czechoslovakia therefore was not threatened precisely because Germany was hobbled. Talk about omitted variables bias!

 From Sargent's perspective, the "sound" monetary and fiscal policies undertaken by the new state of Czechoslovakia is the fifth observation confirming his hypothesis, but in reality there was never an existential threat to its politics or economy once it had been carved out of Austria-Hungary and set up as an anti-German bulwark.

So what's the harm in Sargent's paper, besides its bad history? As I see it, two things:

1. The conflation of inflation and hyperinflation. Sargent seeks economic lessons in the cost to output and employment from ending the sort of stagflation that characterized the 1970s in developed economies. For that, he looks to this episode(s) of hyperinflation and sees that ending them was not costly. To the contrary.

In fact, hyperinflation happens because of state collapse or near-collapse. That's fundamentally different from why there was much lower but persistent inflation in the 1970s. The postwar hyperinflation ended because the Allies decided that Weimar and other successors to the Central powers should be allowed to exist.

2. More importantly, "The Ends of Four Big Inflations" propagates the myth that monetary policy is easy to get right, once it's in the hands of a superman central banker whose force of discipline cows disorderly workers into accepting at least a restraint in wage increases, if not wage cuts. That economic view was popular in the 1980s, even though, as Paul Krugman notes here, it basically failed: the Volcker disinflation was very costly. Much more harmfully, thanks to the Maastricht Treaty, it is enshrined in the mandate of the European Central Bank, to devastating effect during the past several years. That crisis has only mitigated when the officials with discretion over Eurozone macroeconomic policy were able to wriggle free of the constraints the treaty put on the ECB's facility to buy distressed government debt.

When I TAed undergraduate macroeconomics at the University of Chicago, there was a problem set with the following scenario, presented as a factual historical statement: in order to win the 1980 general election, the government of Brazil decided to fool voters into thinking their wages had gone up by printing money at a greater rate. What is the time path of nominal and real wages? Then, in 1985, a new government decided to tame inflation by appointing a central banker from the University of Chicago. What happens to inflation then?

In 1980 (and until the late 80s-early 90s), Brazil was governed by a US-backed military junta. Needless to say, there was no general election in 1980, and the story about its monetary policy dynamics is false from beginning to end. If it suffered from high inflation, that wasn't because its democratically-elected regime was too spineless to give the voters a dose of UChicago patent medicine.

Nonetheless, this idea of the craven politicians and the savior economists/central bankers has been a persistent but useful myth. The actual treatment can start with a dose of historical reality.

Is Student Debt Only a Problem for Dropouts?

In a recent article in the otherwise-excellent Washington Monthly issue on inequality, Rachel Fishman argues that college debt isn't a problem. Instead, low graduation rates are. Her article follows a Brookings Institution report that took a similar line from June, greeted with applause for its willingness to question the conventional wisdom about a flood of student debt drowning young workers.

The facts, unfortunately, aren't so optimistic. While it's true that college dropouts carrying higher education debt loads face a dire labor market situation, they're not the only ones. The happy talk about student debt for those who do manage to graduate is misplaced, as is the idea that the labor market's problems could be solved if more people manage to complete their BAs.

The key evidence is from a recent paper by Beaudry, Green, and Sand. Those authors show that demand for skilled labor has declined substantially since 2000, even during the expansion that ended in 2007 and even as the supply of college graduates increased. As a result, college graduates take jobs that didn't previously require a BA, "filtering down" the labor market hierarchy in what my colleague Elisabeth Jacobs calls "a cruel game of musical chairs." As a result, those with fewer educational credentials get forced out of employment and the labor market altogether, and those lucky enough to have jobs aren't in a position to demand higher wages.

Fishman, on the other hand, writes "at current graduation rates, the United States will fall five million credentials short of meeting labor market demands by 2020." I have no idea where that forecast of labor demand growth come from, but it would be fair to say it's completely at odds with reality. She writes that "according to research by Georgetown University, over half of the added jobs since the recession have gone to those who have a bachelor's degree or better." It's unclear what research Fishman is referring to or whether that factual claim is about job creation or total hires (that is, new jobs plus continuously-existing jobs whose occupants have turned over), but regardless: the claim is false. I've plotted cumulative job creation and hires since the first quarter of 2009 for all workers and for those with a BA or higher credential below, as reported by the Quarterly Workforce Indicators. In fact, insofar as there has been hiring and job creation, it's been among low-wage, low-education-qualification jobs.

Let's consider Fishman's main point. She writes "college degrees generally provide students enough of a bump in income to cover the cost of paying back loans." College grads do indeed earn significantly more than those who don't manage to graduate. But is the difference enough to make up for the increase in the cost of higher education? That depends, of course, on how much education costs have increased, and I haven't yet assembled illustrative data on that question. As for simple college wage premiums, however, it certainly doesn't look like the wages graduates earn make up for the increased cost of college.

I would argue that the implication of this data is that while there is a persistent gap in average earnings among those who do gain employment at different educational qualification levels, that gap is essentially static since 1990.

What would be especially informative here is wage premia weighted by access to jobs. We do know that the more educational credentials workers have, the lower their unemployment rate and the easier it is to find a job. If that's true, the real benefit to a college degree in a persistently slack labor market is not wages, but job security. The implication of that fact is stark and entirely contrary to Fishman's argument that increasing the share of workers with college degrees would reduce inequality. On the contrary, if there were more college grads, inequality would be worse, because lower-wage workers would be pushed out of the labor market entirely.

Additionally, there's evidence that recent college grads entering a labor market with depressed demand for their skills don't enjoy as large a wage gain as previous cohorts.

In the near future, I will present evidence on wages by education group and age cohort, as well as education costs, to investigate what's happened to the relative rate of return to college. Given the dire story I've been telling, it's something of a puzzle that educational attainment hasn't declined. I suspect that puzzle is explained by the job-security/musical chairs mechanism, but the data will tell. One thing we can say for sure, however, is that there's very little good news for workers to be found in the wage data, no matter how good their educational credentials. And pushing college students to saddle up with debt in a push for their BA, even if it does make sense as an individual decision, would probably cause yet worse outcomes for the uncredentialed and result in higher inequality overall.