The College Wage Premium vs the Marriage Wage Premium

She Did. He Did. They Are.

This is adapted from my article published by the Oklahoma Council of Public Affairs in their July Issue of the Perspective Magazine.

There is a lot of discussion in the mainstream media about the “college wage premium”—the benefit gained by earning a college diploma in terms of one’s long-term earning potential. Going to college provides many benefits to an employer, such as increased skills and a signal of work effort. In economic terms, college reshapes a person’s life by increasing his or her productivity, which higher productivity leads to higher earnings.

However, obtaining a college diploma is not the only life-altering event that can reshape a person’s life. Another major event is starting a family, which begins with marriage. After marriage, behavior often changes for the better, especially for men, as a person takes on the added responsibility of caring for a household. While harder to quantify, married people are more productive, as shown by higher earnings.

Unfortunately, the “marriage wage premium”—the earnings boost stemming from marriage—is not as widely discussed, or lauded, as the college wage premium.

We recently examined data from the U. S. Bureau of Labor Statistics (BLS) Current Population Survey as published in the October 2012 report, “Highlights of Women’s Earnings in 2012.” (PDF) The data in the two nearby tables show a significant boost in earnings from marriage. Indeed, for the majority of workers the boost exceeds that of going to college.

Table 1 shows the median weekly earnings of all workers in America in 2012. A person with a high school diploma earns $652 per week while a person with at least a bachelor’s degree earns $1,165 per week—a difference of 79 percent. The college premium is also higher for men than it is for women.

Table 1 also shows the median weekly earnings of people who have never been married at $609 per week while a married person earns $880 per week—a difference of 44 percent. The marriage premium is also higher for men than it is for women.

Table 1 Median Weekly Earnings by Characteristic

However, the majority of America’s employed work on an hourly basis (59 percent). These workers tend to be blue collar and thus middle class. For these workers, the situation is very different, as shown in Table 2.

A person with a high school degree earns $13.58 per hour while a person with at least a bachelor’s degree earns $18.18 per hour—a difference of 39 percent. The college premium is also higher for women than it is for men.

Table 2 also shows the median hourly earnings of people who have never been married at $10.16 per hour while a married person earns $14.99 per hour—a difference of 48 percent. The marriage premium is also higher for men than it is for women.

Table 2 Median Hourly Earnings by Characteristic

It is very interesting how the marriage premium, on a percentage basis, is actually higher for the majority of working Americans—yet marriage gets so little attention in the media. There is significant social and human capital formation that occurs within a marriage—interpersonal skills, dependability, reliability, integrity, flexibility, and motivation, to name just a few—that has tremendous economic value in the workplace (see the Energy Industry Competency Model).

To further illustrate the economic value of marriage, the data also show the impact on earnings from divorce. For both median weekly earnings and median hourly earnings, a person that has been through a divorce suffers a decline in economic productivity (-12 percent for weekly earnings and -5 percent for hourly earnings). In both cases, the negative impact is highest for men.

An important extension of this work would be to further disaggregate the data to better ensure an apples-to-apples comparison. The workers represented actually fall into each of these classifications in different proportions, thus biasing the results. (For instance, “never married” individuals likely represent a greater proportion of “high school graduates,” which makes it less clear which factor is driving the lower earnings.) Even so, these data from the BLS study are enlightening.

Many people lament the fading of the “American Dream” of living a solid middle-class lifestyle, but fail to connect the decline of the American Dream with dramatic increases in divorce and cohabitation. Both cases result in lower household earnings and erode the middle class. Society simply cannot discard the marriage earnings premium without expecting to pay a steep economic cost.

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Family Structure, Geography, and Income Mobility

Lyndon Baines Johnson, Thirty-sixth President (1963-1969)

This is from my article published by the Oklahoma Council of Public Affairs in their March Issue of the Perspective Magazine.

Politicians and economists from the left and the right have been decrying the lack of economic mobility in the United States and offering different solutions to solve the problem. In a recent interview on CNBC, Arthur Brooks, president of the American Enterprise Institute, said that although we should be proud of providing a safety net for Americans in need, we have failed to create an opportunity society.

Brooks says the government has gotten in the way of creating opportunities for personal transformation that are the precursors of success—like faith, family, happiness, and work—for those at the bottom of the economic ladder. Educational reforms that allow school choice are the key inputs needed to achieve this transformation, but these reforms often are not embraced by advocates for the poor, who overwhelmingly attend failing schools.

Another component to creating opportunity for those at the bottom is exposure to entrepreneurship. Brooks says that we’re good at helping the rich with regards to entrepreneurship but we’ve done a terrible job helping those at the bottom become entrepreneurs. Given all the regulatory barriers, it is just too difficult to start a business.

So, with all this focus on the income gap and President Obama’s claim that we live in a continuous state of income inequality where the rich are getting richer and the poor are getting poorer, let’s see what the data have to say.

A January 2014 National Bureau of Economic Research (NBER) study from the Equality of Opportunity Project by Harvard economists Raj Chetty and Nathaniel Hendren and UC Berkley economists Patrick Kline and Emmanuel Saez (pdf) concludes that children born into poverty today are just as likely as their counterparts born 50 years earlier to be poor adults. So, despite President Johnson’s efforts to increase the government’s role in education and health care in 1964, $20 trillion later we haven’t moved the needle with regards to income mobility. Although the poor suffer less today, the odds that a poor child will rise out of poverty are the same as they were 50 years ago.

So, what else can this study tell us about income mobility? There seem to be two important findings. First, these economists find that family structure has the greatest impact on upward mobility. Second, they find that geography matters. More specifically, when ranking the 100 cities (commuting zones) with the largest populations, they find that Salt Lake City has the greatest overall upward mobility and that commuting zones that have more two-parent families exhibit more upward mobility.

According to an analysis by New York Times author David Leonhardt, “Climbing the income ladder occurs less often in the Southeast and industrial Midwest, the data shows, with the odds notably low in Atlanta, Charlotte, Memphis, Raleigh, Indianapolis, Cincinnati, and Columbus. By contrast, some of the highest rates occur in the Northeast, Great Plains, and West, including in New York, Boston, Salt Lake City, Pittsburgh, Seattle, and large swaths of California and Minnesota.”

So, where does Oklahoma fit into this analysis? Of the 100 largest commuting zones, Oklahoma City ranks 41st and Tulsa ranks 44th with regard to upward mobility. There are a total of 741 commuting zones. Of the 16 commuting zones within Oklahoma, the top four are Woodward, Elk City, Guymon, and Enid. Rounding out the bottom are Oklahoma City, Okmulgee, Tulsa, and Muskogee.

Let’s examine a potential scenario to compare income mobility in Oklahoma with regard to its neighboring states. Consider a child born to parents making $31,000 in Oklahoma City. According to the data in this study, that child will, on average, climb the economic ladder and earn $50,000 in adulthood. In Dallas, that same child would end up grossing $48,000 as an adult. In Wichita, the child ends up earning $49,000, and, finally, in Little Rock the child would bring in $45,000.

Overall, Oklahoma is performing well amongst its neighbors when it comes to upward mobility. However, when ranked across the country, Oklahoma’s biggest city is in the middle of the pack. What the Equality of Opportunity study does show us above and beyond anything else is that an emphasis on creating and maintaining two-parent families is not a supplemental prescription to a healthy economy, but a necessary one.

photo by: cliff1066™

In Praise of Enterprise Zones

Obama speaks about the sequester in Washington

This is from my article published by the Oklahoma Council of Public Affairs in their February Issue of the Perspective Magazine.

Economic distress does not always manifest equally throughout America. Some communities are hit hard economically while others may only feel a small economic hiccup. If the same communities are hit repeatedly then they may slide into a state of permanent decline—Detroit is the current poster child for this kind of economic tragedy.

Of course, this is not a new problem. Policymakers have been attempting to tackle hotspots of economic distress for decades. Perhaps the most popularized attempt was the idea of “enterprise zones” first touted by Jack Kemp while serving as Secretary of Housing and Urban Development under President George H.W. Bush.

Fast forward to today and the idea of enterprise zones is alive and well. In fact, President Obama has even embraced the idea of enterprise zones with his recently launched Promise Zones (PZ) initiative.

PZs are designed to help areas of the country that were hit hard by the recent Great Recession and will initially include areas such as San Antonio, Philadelphia, Los Angeles, Southeastern Kentucky, and right here in the Choctaw Nation of Oklahoma. The PZs are intended to help build infrastructure, increase access to education, reduce crime, and, most importantly, provide incentives for businesses to hire and invest by expanding the existing Empowerment Zone tax credit.

Additionally, Senator Rand Paul (R-KY) recently unveiled his Economic Freedom Zones (EFZs) (pdf) which would reduce taxes, enhance educational opportunities, and reduce regulatory burdens. Sen. Paul’s tax reductions include enacting a 5 percent flat rate for the individual and corporate income tax, a 4 percentage point reduction in the payroll tax, boosting expensing on new investments, eliminating the capital gains tax, and a $5,000 per child educational tax credit to help children attend the school that most meets their needs. Unlike PZs, EFZs will be available to any jurisdiction that meets certain criteria and would receive these benefits for 10 years.

However, it’s not just Uncle Sam that has found the enterprise zone model to be useful. There are currently more than 3,000 enterprise-type zones in the United States. Most of these zones are implemented by the states, but they can also be coupled with local tax relief through a popular vehicle known as Tax Increment Financing, which often provides rebates on property taxes or earmarks money to be used for infrastructure improvements.

These initiatives are noteworthy, especially since a new problem has arrived on the scene which threatens to drag down economic prosperity: demographic winter.  Demographic winter is the situation which arises when, due to declining birthrates, there are not enough young people to sustain the current population level. As a consequence, the area afflicted with demographic winter experiences a slow-moving economic depression as both the labor supply and customer base shrinks.

Recently, Kansas implemented a new twist on the enterprise zone model—the Rural Opportunity Zone (ROZ)—in an effort to fight the growing problem of demographic winter in its rural counties. There are currently 73 counties that qualify for a ROZ. ROZs offer individuals a 5-year abatement on their individual income tax and/or student loan repayments up to $15,000 if they move into one of the qualifying counties from out of state.

Overall, enterprise zones, in their many forms, are a step in the right direction. Yet, there are still flaws that reduce their effectiveness. Among the largest flaws is the degree of difficulty complying with the selective parameters of the program. For example, while a tax credit does reduce one’s tax liability, it does not reduce the complexity and compliance costs associated with tax filing—it could actually make them worse. At the extreme, these problems can cause businesses and individuals to forgo the benefits of these zones.

One proposal in Maine seeks to address the problems associated with such complexity. The Free ME initiative would eliminate Maine’s income tax (individual and corporate) and sales tax completely on a county-by-county basis starting in the most economically distressed county. Free ME would create a clean, level playing field for all participants and would not disappear until tangible economic benefits are seen—specifically, seeing the county move back to the state average on key economic variables such as unemployment and poverty. The Free ME initiative is receiving much-deserved state and national attention. This is worth keeping an eye on.

In conclusion, it is not every day that two people from opposite ends of the ideological spectrum, like President Obama and Senator Paul, agree that changing incentives do in fact make a difference in the lives of families across America. This targeted approach embedded in the idea of enterprise zones can help pave the way to broader reforms as the EMZs show progress in tackling some of the most difficult economic challenges of our time, such as stubborn pockets of poverty and demographic winter. The recipe may need tweaking, but at least policymakers are in the right kitchen.