ST. LOUIS – Finance-related gaps among American families with different educational attainment levels have increased on many measures – income, wealth, balance sheet strength and financial health – over the past quarter-century, according to a new report by the Federal Reserve Bank of St. Louis.
Authors William Emmons and Bryan Noeth, senior economic adviser and policy analyst at the St. Louis Fed’s Center for Household Financial Stability, examined the role that education plays in families’ ability to accumulate wealth and found that more education is strongly linked to higher income, better financial decision-making and greater wealth. The essay revealed that the gaps are being driven by large and growing wage premiums for those with a college or postgraduate degree, as well as by differences in financial decision-making exhibited by families with different education levels.
Even though education and wealth are highly correlated, Emmons and Noeth cautioned that the relationship between education and wealth is partly spurious and indirect because several other factors that predict greater educational attainment are at play, including native ability, family background and even better health. Therefore, the direct benefits of education are only one factor among many determining a person’s economic and financial well-being.
Revealing that education is increasingly separating families that are thriving financially from those that are struggling, the essay specifically found that among families headed by someone 40 years or older:
The authors concluded that the connections between education and wealth are likely to become stronger in the future. However, education is likely to contribute less to economic growth than it has in recent decades because women, who are increasingly better-educated than men, continue to face barriers in the workplace and because the population share of blacks and Hispanics, who have much lower educational attainment levels, is increasing.
The essay is the second in a series the center is producing titled “The Demographics of Wealth: How Age, Education and Race Separate Thrivers from Strugglers in Today’s Economy.” The series is based on an analysis of data collected between 1989 and 2013 through the Federal Reserve’s Survey of Consumer Finances, which includes interviews with more than 40,000 heads of households. For this essay, the authors restricted the sample of families studied to only those headed by someone 40 years or older to minimize the possibility of placing a young family in an education group lower than its ultimate degree attainment. The families in the study account for approximately two-thirds of all families included in the survey.
To read the full education report and to watch a video summarizing the findings, please visit https://www.stlouisfed.org/household-financial-stability/the-demographics-of-wealth/essay-2-the-role-of-education. There, you will also find a link to the first essay and video, on the link between race/ethnicity and wealth accumulation.