Education vital to wage growth

The economy is thriving and the unemployment rate is the lowest in 18 years, yet increases in wages have been anemic.

Although all economic indicators point to wage growth, economists and others explain that certain policies and other factors have served as impediments. And in order to spur wage growth, education must play a central role.

If there is such a thing as a silver bullet for economic well-being, on personal and societal levels, it is investment in human capital, investment in people. Education is the obvious way to make this investment.

Stronger productivity growth is what is needed to reverse wage stagnation and wage inequality and to achieve stronger productivity requires an educated workforce with the skills necessary to meet labor demands. To complete, but really begin the circle, it takes increased investment in human capital through education and training to produce that educated workforce.

Revitalizing wage growth is the focus of the latest Hamilton Project’s edited volumes of policy papers. Experts, mostly economists, were invited to contribute evidence-based policy proposals to foster a more dynamic economy that in turn will lead to a rise in wages.

Boosting productivity

For nearly four decades, average compensation — of which wages are the primary component — has increased annually by less than one percent. Gross productivity, on the other hand, has grown by about two percent. There are numerous reasons for the disparity, such as uneven labor productivity tilted toward higher-end earners due to another set of reasons, including technical factors of a divergence between farm and non-farm sectors.

These factors have resulted in growing wage inequality. To counter these trends, certain policy interventions are proposed, including those that increase productivity growth, particularly ones that “ensure that typical workers receive a larger share of that growth.”

As important as education is to promoting productivity and growth in earnings, it is not a panacea. Education alone cannot achieve higher productivity; policies promoting dynamism must also be set in place.

What is referred to as economic dynamism, which runs the gamut of activities from business start-ups to switching or relocating for a job, has also declined since the 1990s. The report provides proposals related to changing policies that limit mobility and dynamism, including those that limit worker bargaining ability for wage gains. Writing the opinion in a five-to-four decision of the U.S. Supreme Court, Justice Neil Gorsuch recently ruled in favor of binding arbitration and against worker class action suits. The ruling affects approximately 25 million worker contracts.

Premium beyond wages

Investment in human capital through education should be broad-based, according to this report, starting with early childhood education through postsecondary education and workforce development. “Americans with higher levels of education not only have higher wages, but for the most part, also have higher wage growth.” And at no time has this been more evident than now when the gap in wages between those with and without a college education is the greatest.

Educational attainment, whether a postsecondary certificate, an associate degree or bachelor degree and above, also has an impact on other labor market outcomes. These include lower rates of unemployment and higher rates of participation in the labor force.

It also must be said that the gains from educational attainment are not equally distributed. Wage growth and other economic outcomes differ by sex, race and ethnicity, and socioeconomic status.

Geography also plays an important role in access to education and economic opportunity. The very workers who have experienced stagnant wage growth are those who are stymied from either pursuing higher education in the first place or even with more education relocating in pursuit of better paying jobs.

A new approach to student aid is proposed to tackle this problem – offering enhanced or supplemental Pell grants to qualifying students. This is a completely new idea that, while intriguing, needs more analysis from a policy perspective.

About the Author

Jolanta Juszkiewicz
is director of policy analysis at the American Association of Community Colleges.