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14.48, Economics of Education Prof. Frank Levy Lecture 12 Question from last lecture: Why do graduate degree holders' salaries keep pace with increases in their productivity while the salaries of BA degree holders do not? Answer: Ian Tingbergen, a Nobel Prize winning economist, said that you can think about income inequality as a race between technology and education. As society grows ever more technologically advanced, education also needs to evolve and become more advanced to teach humans skills that technology cannot substitute for. If the supply of skilled labor is constant, wages increase greatly when the demand for skilled labor increases. If supply and demand of skilled labor both increase, the increase in skilled labor wages is not as great. A Bachelor's degree may be like the HS degree of the past-the minimum amount of education needed to get a decent paying job in today's workforce. So far, we've discussed : -SBTC as favoring the average college grad over the average HS grad. As technology advances, you need more and more advanced degrees to keep up. -SBTC is starting to distinguish among college grads, perhaps favoring graduate degrees over BA's as well as favoring BS degrees over BA degrees. -Education differences help explain income inequality in the US, but there is more to this story. Economists use two main sources of data to measure income inequality: 1) Current Population Survey, run by the Bureau of Labor Statistics and the Census Bureau. This database has information for individuals on income, age, occupation, race, etc but not enough information so you could actually identify individuals. Income reported in capped at $lmillion is not reported so you cannot analyze data concerning individuals earning income above $lmil. 2) Treasury data from tax returns. Data available: income and anything else given on tax returns. The drawback on this data is that there is no information on those too poor to pay taxes. The top 1% of reported incomes in the US as a share of total income reported (excluding capital gains): Early 1980s- 8% 2004: 16% Clearly, there is an increasing concentration of wealth in the United States. In 2004, there were 1.3 million tax units with income greater than or equal to $300,000. These 1.3 million tax units had an average income of $1.3million. The average BA/BS salary is well below $100,000, though it does vary by age. So how do you explain why or how some people earn so much money? These very high earners don't have 3 or 4 PhDs. At the end of WWII, there was a general increase in productivity which resulted in an increase in income for workers of all skill levels. Over the last 15 years or so, most productivity gains have been accruing to the top earners. Is there any educational theory to explain increasing wealth concentration? Extreme SBTC: Winner takes all/superstar technologies: 14.48, The Economics of Education Lecture 12 Prof. Frank Levy Page 1 of 5-The idea is actually fairly old. Alfred Marshall, a Cambridge economist, wrote in the early 1900s about anything and everything, including super star professions. -iPhone; It is projected to initially make a lot of money but competitors will eventually enter the market with close substitutes and capture some of the market. -What about someone with a skill that does not have a close substitute? Say a rich businessman has a legal problem. Lawyer Smith is said to be the best litigator in all of London. Therefore, he can charge very high fees because there is no direct competition. In the 1980s, there were enormous rounds of takeovers, and investment bankers could charge very high fees because companies thought they needed their expertise for a deal that could only be done once. Sherwin Rosen: Studied the impact of N on superstar salaries. 50 years ago, if you wanted to watch a golf tournament, you had to wait for one of the many PGA tournaments to play nearby. Now, you can just turn on your TV and watch a famous tournament. However, most people know and watch for the famous like Tiger Woods. Why were productivity gains shared more equitably in the past? There were a lot of other factors involved other than just increasing productivity, especially government involvement through high taxes as well as unions pushing for higher wages. Where did the legislation come from in the past? The New Deal policies were implemented in part to prevent another depression and also to life the economy out of the Great Depression. In 1933, the economy was miserable. Unemployment was around 25%, and the country was plagued by labor unrest. What would you do in response? There wasn't any macroeconomic policy for the government to follow. One idea was that transactions in the economy weren't generating enough money to get the economy moving. If prices and wages were kept high, transactions will generate significant income for people. How would you analyze this approach today? This policy isn't going to employ more people with high transaction costs. It will result in fewer transactions, with each individual transaction worth more. So what really got the US out of the Great Depression? WWII, which required huge levels of deficit spending. Truman's 1945 conference: President Truman held an economic conference on labor relations which lasted 3 weeks. He invited 34 people including business leaders, heads of unions, etc. Many people in the government and industry were worried that unions were going to make huge demands for increases in wages, benefits, etc post WWII which could escalate into strikes across the country. Truman called together all the people he thought he needed to control wages, prices, and union behavior. Why was this system/approach abandoned? See Inequality and Institutions in 20th Century America by Levy and Temin. Goals of Education: 1) Stronger basic skills 2) More advanced skills 3) More kids to college Tools for K-12 Education: 1) More money or smaller class sizes 2) School choice 14.48, The Economics of Education Lecture 12 Prof. Frank Levy Page 2 of 53) Standards and assessments 4) In service teacher training, better teacher selection 5) Technology in the classroom Education Production Functions: (Achievement Test score), = a,+ Z (xv) Ok, but what do we mean by a production function? Cobb-Doug lass: Q = ~'"-1' ln(Q)=ln(a)+a@zaln(K)+(l -a)ln(L) What are we assuming when we use these functions? There are a lot of different ways to


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MIT 11 126J - Lecture Notes

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