it's been a long time

Increasingly, I have wanted to write on this more. I went so far as to purchase walterlamberson.com (which I think is a good idea even if you don't use yourname.com just to ensure no one can slander you in the future). My desire to write more on this is motivated, mostly, by the realization that I will graduate in five months. After that, it will be a real challenge to keep up with people.

Anyway, there is a paper I read last night which I would like to write about here. Finnis Welch is an economist at Texas A&M (and founder of the STATA Corporation, if you're a nerd). He has co-authored many papers on wage inequality with Kevin Murphy, of whom I am a big fan. Last night I read "In Defense of Inequality." As you can tell by the title, it's sort of a provocative piece.

The paper is brilliant because Welch breaks down inequality to the forces that cause it, and argues that don't want those forces to work any other way. He begins with Jacob Mincer's equation, which is probably the most frequently regressed equation in the social sciences. The equation relates wage to an individual's years of education and experience. If education becomes more valuable, inequality increases. If years of experience become more valuable, inequality increases.

Think about the years of education. If the coefficient on education in the equation increases, people with fewer-than-average years of education loose relative to the mean. But everyone else, including future generation who have not yet left school stand to have more social mobility--assuming they have a choice about how much education they receive. Consider the alternative: if education became less important there would be less inequality, but it would mean there is much less social mobility. In fact, if education were uncorrelated with wage, your education wouldn't affect how much you earn relative to the mean.

Now consider experience. If this coefficient increases, the observed inequality increases. Young people have fewer than average years of experience, so they would loose income relative to the mean. But young people turn into old people. They will make up for what they don't earn now in the future. It's tough to argue that this is bad.

The only thing that is left in the equation is the residual. The residual is everything the difference between what you actually earn, and what your years of education and experience predict you will earn. If the variance of the residual increases, then inequality increases. A high variance means that education and experience alone do not explain wage very well. To Welch, this is good: if we have a high residual, there are a lot of random effects that determine one's income. Again, consider the alternative; if the variance of the residual were zero, then income would depend only on school and age. The only decisions you would ever make is when to leave school. From there, the clock would tick and your wage would increase. A variance, even a high one, is a good thing.

And that's it. Welch, that quickly, dealt with everything that explains inequality. If you agree that increases in the returns to education, increases in the effect of experience, increases in the variance of the residual are good, or that they are not bad, then you don't have a problem with inequality. It's a powerful argument, and one worth thinking about.

In a big way, it relies on the higher-level idea suggested by Milton Friedman that wage and income are not the same. Wage is how much you happen to earn at a certain point in time. Income, however, is what you will earn or could earn over your entire lifetime. It's well documented that wage inequality had increased over the last forty years. Personally, I would fee very different about this increase if I knew it was the same people consistently earning low wages throughout their lives, than i I thought poor people are only poor for a while, and with time they move up.

Imagine a society characterized by its great social mobility. Great social mobility means hard work opens doors. "Hard work" is difficult to measure, but for most people I know, the amount of education you endure is a good proxy. Most people would agree that for society to have great social mobility, people who get educated can succeed, regardless of where they've come from.

This society would have enormous inequality. Well educated people, whatever their background, would earn well above average, and those with less than average educations would earn far less.

In the last forty years--the same forty years in which American saw a sharp rise in wage inequality--we moved much closer to the society characterized by its social mobility. Education is a much better determinant of how much money you will earn than it ever has been before.

The problem, to me, is not that education is more valuable, it's that education is not available to everyone. For people who decry inequality: the problem is not that education is more valuable than it ever has been and society doesn't pay low-skill workers in Detroit what it used to. The problem is that we are still creating so many low skill workers. The problem is not that McDonalds pays an "unfair" wage to kids from the ghetto, the problem is that so many kids from the ghetto don't have an education, and can't do anything else. Raising the minimum wage and subsidizing domestic auto manufacturers are often suggested as solutions to the inequality problem (and suggested by the political party I, ostensibly, belong to). But they are band-aids. These solutions try to reduce inequality by making a fundamental lack in skills less important in an individuals' earning potential. They reduce social mobility.

The underlying problem, and the one no politician wants to touch, is that the schools in much of America fail to teach anything valuable. When kids don't learn anything valuable in school, they don't stay. I don't blame them. The very high dropout rate in the inner city is often lamented, but this is misdirected. I used to tutor at a public high school on the south side of Chicago. I have never spent one second wishing that the kids who dropped out would stay: the environment was insulting to their intelligence. Spending ten years in an inner-city high school couldn't make you better off. If anything, leaving school and working might give some people some kind of opportunity to lean something valuable.

Inner-city schools do suck, but the problem with inner city schools is more complicated than one we can throw money at... though that would help. There was a major change in the early 80s in the demographic composition of the "ghetto". Formerly, the ghetto was diverse: a place where working, middle class families lived along side single mothers and out-of-work fathers. In the 80s, working families migrated out en masse. Today, most adults in inner cities do not work in a typical week.* For a child, growing up in the presence of working adults is very different from growing up in their absence. An impoverished neighborhood where adults work fosters a work ethic, education ethic, and set of capabilities that do not prevail where adults do not work. This is an enormous problem which inner-city schools are asked to overcome. It is not surprising that these schools regularly fail.

These social obstacles make public education as we attempt it impossible. No one can honestly say that everyone has an opportunity to receive the same education. This education deficit is the greatest threat to social mobility. Inequality, low wages, labor rights, and globalization are not the problem. They are symptoms of a lack of educational opportunity for millions of people. This imbalance of educational opportunities is worthy of its own civil rights movement. Based on what I have read, it is fixable, but it would require the effort of going to the moon ten times.

What to do about this is a more complicated question, and maybe one I will write about later.