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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Human Capital Enables Flexibility



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In a recent post, I cite data from Carnevale and Rose to suggest that U.S. human capital and immigration policy ought to be oriented towards increasing the share of the U.S. workforce with post-secondary education, as doing so will tend to reduce the size of the college wage premium by making less-skilled workers relatively scarce. But as Andrew Biggs and Abigail Haddad have recently observed, there is reason to believe that the income gains attributable to college completion are not as high as has been commonly assumed:

[Michael] Greenstone and [Adam] Looney also assumes that high school graduates who attend college are the same as those who don’t, meaning that college education is the only thing driving earnings differences later in life. This is far from true. High school students who go on to college took a more rigorous high school curriculum, scored better on tests of reading and math, came from higher-income families, were in better physical and mental health, and were less likely to have been arrested. These are all correlated with higher earnings regardless of whether a person attends college, either because they contribute directly to higher pay or because they proxy for other factors that do. How much a college education increases the incomes of those who attend is a different question than the simple difference in earnings between college grads and individuals with only a high school diploma.

Using the 1997 National Longitudinal Survey of Youth it is possible to control for these and other differences between college grads and the rest of us. Once you control for both the risk of not graduating from college and differing personal characteristics, the earnings boost attributable to college attendance is cut in half. Looking at data that includes people from a wider age range confirms these results. Treating the entire wage gap between high school and college graduates as if it’s due to going to college significantly overstates the financial benefits of attending college.

The point raised by Biggs and Haddad is well taken. A college education is best understood as a proxy for other qualities that tend to correlate with success in the labor market. And that is why I tend to emphasize the importance of post-secondary education in determining who should and should not be allowed to work and settle in the U.S. Recently, I reread Edward Glaeser’s and Albert Saiz’s 2003 article on “The Rise of the Skilled City,” which includes the following passage:

One possible explanation for the strikingly different correlation between skills and growth in growing and declining places is that skills allow reinvention. The view that human capital is most valuable because it enables flexibility and the ability to respond to new circumstances was emphasized by Welch (1968). If this view is correct, then we should not be surprised if a high skill New England city manages to reinvent itself while a low skill rustbelt town does not.

One implication of this hypothesis is that places with high human capital should be better at switching out of declining industries. To test this hypothesis, we gathered data on education and industrial composition in 1940 by metropolitan area (contemporaneously defined). We then tested whether the impact of skills on contributing to the shift away of manufacturing over the next 30 years has been more important in industrial, colder areas of the country (Table 10, Panel B). The regressions support the view that the skilled rustbelt towns were better at reorienting themselves: the importance of education to left-hand-side) in the second half of the 20th Century was stronger in colder areas (interaction between human capital and temperature) and in areas with an initial bigger share of manufacturing (interaction between education and share manufacturing) explain the shift away of manufacturing (the change in the manufacturing share in the left-hand-side) in the second half of the 20th Century was stronger in colder areas (interaction between human capital and temperature) and in areas with an initial bigger share of manufacturing (interaction between education and share manufacturing). [Emphasis added]

The central risk associated with less-skilled immigration, in my view, is that it will increase the number of Americans who are ill-suited to successfully navigating economic change. In an ideal world, we could identify the qualities that are associated with upward mobility, the capacity for economic self-reliance, and flexibility in potential immigrants in some more precise way. But in the absence of these metrics, post-secondary education is a decent indicator of likely labor market success. 



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