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What Is Causing the College Premium to Shrink?

Tuesday, January 26, 2021

People with a college degree generally earn more and are wealthier than those without a college degree. But income and wealth premiums for a college education have shrunk for those born more recently. What may help explain this?

During a recent Dialogue with the Fed event, Assistant Vice President and economist William R. Emmons discussed trends in income and wealth premiums for those with bachelor’s degrees and those with postgraduate degrees. His discussion was based on recently published research on the returns to college education, done with Ana Kent and Lowell Ricketts, both with the St. Louis Fed’s Center for Household Financial Stability.

One reason for shrinking premiums may be as simple as whether you were lucky enough to be born at the right time, Emmons posited during the event.

“You were much better off entering those (housing and stock) markets in 1960 or 1980 than you were in 2000 or today,” he said.

Emmons also pointed out that financial liberalization in recent years made credit more available.

“In some sense, it’s a great blessing, gives us a lot more flexibility, but it also could be a curse,” he said. “There’s a lot of evidence that suggests that having more access to credit does slow down saving.”

Another reason may be the rising cost of college education over the past four decades, Emmons proposed.

College education itself may also explain why the income advantage to a college degree has held up, while the wealth advantage appears to have diminished, he added.

Because higher education can make a person more productive, “college boosts your income while colleges extract your wealth, what economists would call price discrimination,” he said. “Colleges have figured out that people really want this experience, they want this degree, so they’re able to charge more for it.”

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