College Grad Earnings Continue to Fall in 2011

Even as President Obama proposes some steps for student debt relief,  real wages for college graduates continue to plunge.  In the third quarter of 2011,  full-time workers with a bachelor’s degree and no advanced degree earned 3.5% less, in real terms, than a year earlier.*  Male college graduates saw their real wages fall by 5.3% over the past year,  while female college graduates had a 1.4% decline.

This continues a long term trend of declining real wages for college graduates. I discussed the plight of young college grads here.  Because real wages are declining, it’s much harder for grads to pay back their loans.

 

*Median weekly earnings, full-time workers 25 years and older with a bachelor’s degree only. See the BLS press release here).

 

 

Education-Based Inequality Increased In 2010

I usually don’t like graphs with lots of lines, but this one is too important to pass up.

This chart shows median weekly wages for full-time wage and salary workers, adjusted for inflation, and indexed to 2000 (the data comes from the BLS   “usual weekly earnings” series). There are three things to take away from this chart. 

*First, the wage gap between holders of advanced degrees and everyone else widened in 2010.

*Second, workers with advanced degrees have done much  better than everyone else over the medium run,  both since 2000 and since the Great Recession started in 2007. For example, since  2007,  real weekly wages for advanced degree holders have risen by 3.8%, compared to a 0.1% decline for holders of bachelor’s degrees only.

*Third, over the past ten years, the pay for a bachelor’s degree has more or less tracked the pay for high school grads. 

Now, within advanced degree holders, the pay inequality has widened as well. Take a look at this chart. The top decile–that is, the dividing line between the top 10% of advanced degree holders and everyone else–has risen 13% over the past ten years.  The median and the third quartile (top 75%) has risen by 3-4%, while the bottom 25% of advanced degree holders is actually down since 2000.

Who Got the Wage Gains, 2000-2009

This weekend I’m writing a draft of my new paper, “Biosciences and the Long-Run Economic Recovery.” Along the way I came up with three charts that I thought I’d share with you. I’m not going to put much gloss on these, because they are pretty much self-explanatory, and because I need to get back to the paper.

This first chart shows the change in wage and salary payments by major industry from 2000-2009, adjusted for inflation, using BEA data. We see that healthcare and social assistance generated $210 billion in real wage gains from 2000 to 2009 (all in 2009 dollars). Next biggest was state and local government, which generated $151 billion in real wage gains. (The exact numbers change a lot if I change the end dates, but the pattern stays the same).

On the other hand, the big losers were manufacturing (-$245 billion), information (-$56 billion), retail trade (-$24 billion), and transportation and warehousing (-$6 billion). It’s interesting that the industries in the global supply chain were the big losers in real wages, but I’m not sure quite what to make of it.

Now I’m going to take the same data and cut it by federal govt, state and local govt, and private sector. The short answer is that the public sector accounted for 55% of real wage gains between 2000 and 2009, while the private sector only accounted for 45%. Once again, this is not necessarily a surprise, but it’s still interesting.

Now we get to the third chart (having fun with 3D pie charts–like it?). What we see is that health and education (public and private) accounted for an amazing 75% of real wage and salary gains between 2000 and 2009. The rest of the economy–only 25%.  Make that what you will.

The State of Young College Grads

The 2009 income figures came out today, and I immediately gravitated to my favorite barometer for the state of the economy: The earnings of young college grads–that is, mean earnings for full-time workers, ages 25-34,  with a bachelor’s only.

I consider these workers to directly reflect the health of the U.S. economy. If young college grads are doing well, that means there is a demand for high-skilled labor, and there’s an incentive for young people to get an education.  But if young college grads are doing poorly, wow…that economy is not on a sustainable path.

Take a look at the chart above, which plots tuition and fees at 4-year colleges, public and private nfp, against the earnings of young college grads, male and female. The results show that college costs have kept rising, while the real earnings of young college grads have gone down since 2000. In particular, since the recession started in 2006,  real tuitions and fees have skyrocketed, while real earnings have plummeted.

This helps explain why college debt has become so much more onerous for students….wages have not risen as fast as college costs.

The Creative Economy and College Grads

Felix Salmon was nice enough to pick up my recent post on the Creative Economy  (Note: Felix blogs for Reuters and I am doing video commentaries for the new Reuters Insider service, which makes us colleagues of a sort).  However, he does put in a plug for a college education:

The long-term trend is inescapable: the returns to education are large and growing, and if you’re not a college graduate and you don’t own your own company, it’s becoming increasingly difficult to maintain a middle-class lifestyle. 

He’s certainly right about the long-term trend, and I’m paying big bucks to put my children through college (hear that, kids? No slacking now).  

But we have to be alert to possible changes in the economics of college. Take a look at this chart, which compares the average earnings of a young college grad with average annual tuition, room and board charges at 4-year colleges.

In 2000,  the average young adult with only a bachelor’s degree earned about 4 times the annual cost of a 4-year college.  By 2008,  the average young college grad was earning less than 3 times the annual cost of college. Going to college is still a good idea–but the payback period is longer.

Here’s another way of seeing the same thing. This chart compares the real cost of 4-year and 2-year college (tuition and fees) with the average earnings of young college grads, young associate degree holders, and young high school grads. I’ve adjusted for inflation, and indexed these numbers to 1998 to make the trends clearer.

If you spend a bit of time with this rather complicated chart, you can see that young adult earnings in real terms have had a slight downward trend over this period  for high school, associate, and college grads (FYI, advanced degree holders seem to be doing better, but that’s a different post).

Meanwhile the real cost of higher education has been increasing. Once again, the conclusion is that the payback period is likely longer, though a full analysis would require looking at unemployment rates and the value of the option to get a higher degree.

I tend to view this divergence between rising real college costs and flat or falling real  earnings  for young college grads as insupportable over the medium term for an economy like the U.S.  Either real pay for college grads has to pick up (perhaps because of a surge of innovation), or the real cost of higher ed has to stop rising.

I am hoping that the next business cycle will bring more innovation and more high-paying opportunities for young college grads, and better times for high-education metro areas.  But there are no guarantees, and unfortunately, current economic policy does not seem to be doing much to help.

Public Sector Pay Outpaces Private Pay

We all know that state and local government finances are a mess. This chart helps explain why. {IMPORTANT NOTE:  I REVISED THE CHART TO CORRECT A PROBLEM WITH THE INFLATION ADJUSTMENT}

The top line tracks the real compensation of all state and local government workers–wages and benefits, adjusted for inflation.  The lower line tracks the real compensation of all private sector workers.  The data comes from the Employment Cost Index data published by the BLS.

The chart shows that public and private sector pay rose in parallel from 2001 to 2004. Then the lines diverged. Since early 2005, public sector pay has risen by 5% in real terms. Meanwhile, private sector pay has been flat.

This one fact explains much of the fiscal stress at the state and local level—why states such as New York, New Jersey, and California are in such a mess. State and local governments pay more than $1 trillion in compensation annually (actually, that’s an astounding number–I had no idea it was that high). If compensation is 5% higher than it should be, that’s $50 billion in excess pay costs for the state.

And lo and behold, that $50 billion would roughly cover the total size of the state budget gaps. For example,  in February a survey found that the combined budget gap of all 50 states was $55 billion for the 2011 budget year and $62 billion for the 2012 budget year . (The survey was done by the National Governors Association and the National Association of State Budget Officers)  

Now, I’m not anti-government, by any means. But this trend is disturbing. In times of crisis and economic struggle,  government workers should not be getting bigger pay increases than the private sector. The domestic private sector has really been struggling for a decade, both in terms of job and pay.  But the public sector kept paying higher compensation.

The arithmetic is very clear. State and local governments can’t keep funding higher wages and better benefits for their workers, while the private sector struggles. As a wise man once said, you can’t wring blood from a stone.  And you can’t ask troubled taxpayers to pony up bigger pay gains for government workers than they are getting themselves.

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