Does More Education Make People Wealthier? - Pacific Standard

Does More Education Make People Wealthier?

A new report suggests a strong correlation between education and wealth, but not-so-strong causation.
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Harvard University. (Photo: Jorge Salcedo/Shutterstock)

Harvard University. (Photo: Jorge Salcedo/Shutterstock)

People's level of educational attainment is more strongly tied to their wealth than ever, according to a new report. But it's not so straightforward: There seems to be a limit to the degree to which education can make people richer. As one of the report's authors, William Emmons of the Federal Reserve Bank of St. Louis, told Bloomberg Business, education "is important, but it's not the whole story. You can't simply send everyone to college and expect to solve all the social problems that we have, including problems in the job market."

The report, written by three analysts from the Federal Reserve Bank of St. Louis, analyzes data from more than 40,000 American families, whom the Federal Reserve interviewed between 1989 and 2013. It offers some interesting data in the ongoing debate about the value of college degrees.

Let's look at the St. Louis report in two parts:

PART THE FIRST: WEALTH IS MORE STRONGLY TIED TO EDUCATION THAN IT EVER HAS BEEN

Between 1989 and 2013, the gap between the least- and most-educated families in wealth—that's how much a family owns, minus its debts—widened dramatically.

In 2013, households headed by those 40 or up without a high school diploma had a median net worth of $37,766. That's 44 percent less than their peers in 1989 (adjusted for inflation). Households headed by somebody with a high school diploma had a median net worth of $95,072, which is 36 percent less than high school diploma-holding households in 1989. By contrast, the median net worth of households headed by somebody with a two- or four-year degree didn't change much between 1989 and 2013; it's now $273,488, just three percent more than it was in 1989. Meanwhile, the median worth for a household headed by somebody with a degree beyond a Bachelor's was $689,1000, 45 percent more than their 1989 counterparts.

Here's another way to think about the gap: Among families with a graduate degree, the chances of having at least $1 million is better than one in three. Among families without a high school diploma, the chances are about one in 110.

PART THE SECOND: DOES GETTING MORE EDUCATION CAUSE PEOPLE TO ACCUMULATE MORE WEALTH?

Education helps people make more money only to an extent; there are many other factors. One piece of evidence to support that notion: the relatively small changes in income experienced by different education brackets since 1989. Families headed by someone without a college degree earn less now than they did three decades ago, but the decline in median income is five percent or less. Similarly, families headed by someone with a graduate degree earn just four percent more than their 1989 counterparts. Households with a two- or four-year degree took the biggest hit, making a median income that's 16 percent lower than it was in 1989.

Income is something that's directly tied to education. Get more education and you're more likely to be paid a higher wage for your work and skills. Yet changes in family incomes at different levels of education can't explain the entire wealth gap, which is much greater than the changes in income. (Plus, families with a two- or four-year degree are now earning less, as a median, but have slightly more wealth, than in 1989.)

The report points out a few possible non-educational explanations for why those with more education are more likely to accumulate wealth. Better-educated people are more likely to get "sizable" inheritances or gifts, for example. Half of households with the most education do, compared to 15 percent of households with the least education. In addition, better-educated wage-earners are likely to be healthier to begin with, which correlates to a longer work life and fewer health expenses. The report doesn't look at how these factors have changed since 1989, however, so it's unclear why it seems harder now for less-educated families to save.

The report doesn't offer any obvious solutions to closing the wealth gap between the most- and least-educated families either. At least it reveals one insight: While making college more accessible will likely be somewhat helpful, solving the wealth gap will require some other programs too.

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