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  • Economic Letter: 'College Degree Remains Worthwhile Investment'

    Mary C. Daly , senior vice president at the San Francisco Fed, and Leila Bengali , research associate, weigh in on the value of higher education in a new Economic Letter . And like others who take a research driven approach, as opposed to the anecdotal approach that some in the media seem to prefer, they find that there is still clear value in going to college. In fact, they say the value "remains high." A common way to track the value of going to college is to estimate a college earnings premium, which is the amount college graduates earn relative to high school graduates. We measure earnings for each year as the annual labor income for the prior year, adjusted for inflation using the consumer price index (CPI-U), reported in 2011 dollars. The earnings premium refers to the difference between average annual labor income for high school and college graduates. We use data on household heads and partners from the Panel Study of Income Dynamics (PSID). The PSID is a longitudinal study that follows individuals living in the United States over a long time span. The survey began in 1968 and now has more than 40 years of data including educational attainment and labor market income. To focus on the value of a college degree relative to less education, we exclude people with more than a four-year degree. Figure 1 shows the earnings premium relative to high school graduates for individuals with a four-year college degree and for those with some college but no four-year degree. The payoff from a degree is apparent. Although the premium has fluctuated over time, at its lowest in 1980 it was about $15,750, meaning that individuals with a four-year college degree earned about 43% more on average than those with only a high school degree. In 2011, the latest data available in our sample, college graduates earned on average about $20,050 (61%) more per year than high school graduates. Over the entire sample period the college earnings premium has averaged about $20,300 (57%) per year. The premium is much smaller, although not zero, for workers with some college but no four-year degree. A potential shortcoming of the results in Figure 1 is that they combine the earnings outcomes for all college graduates, regardless of when they earned a degree. This can be misleading if the value from a college education has varied across groups from different graduation decades, called “cohorts.” To examine whether the college earnings premium has changed from one generation to the next, we take advantage of the fact that the PSID follows people over a long period of time, which allows us to track college graduation dates and subsequent earnings. Using these data we compute the college earnings premium for three college graduate cohorts, namely those graduating in the 1950s–60s, the 1970s–80s, and the 1990s–2000s. The premium measures the difference between the average annual earnings of college graduates and high school graduates over their work lives. To account for the fact that high school graduates gain work experience during the four years they are not in college, we compare earnings of college graduates in each year since graduation to earnings of high school graduates in years since graduation plus four. We also adjust the estimates for any large annual fluctuations by using a three-year centered moving average, which plots a specific year as the average of earnings from that year, the year before, and the year after. Read Is It Still Worth Going to College? here .
  • The Stickiness of Wages

    In a new Economic Letter , San Francisco Fed economists Mary Daly , Bart Hobjin , and Timothy Ni take a look at wage rigidity. In what may seem counter-intuitive, wage growth did not slow much during the Great Recession, even as unemployment climbed rapidly. And now wages are not rising much during the economic recovery and dropping unemployment. Apparently, this has happened in other recent recessions, though the extent to which wages have been slow to respond to overall economic change seems greater. Figure 1 clearly shows downward nominal wage rigidity in the distribution of wage changes among U.S. workers in 2006 and 2011. The data cover all workers and measure how their wages compared with their previous year’s wages, if they were employed. We use 2006 as an example of a typical wage change distribution and compare those numbers with the post-recession wage changes for 2011. The distribution of wage changes in 2006 and 2011 both spike at zero, suggesting that the wages of many workers did not change from year to year. In both years, the distribution is larger to the right of zero, that is, for wage increases, than to the left of zero, for wage cuts. Consistent with downward nominal rigidity, this suggests that a large fraction of wage cuts employers wanted to carry out were not actually made. Instead, those workers were swept into the zero-change group. What is more interesting in this figure is how 2006 and 2011 data differ. First, the fraction of workers whose wages were frozen jumped from 12% of the workforce in 2006 to 16% in 2011. Second, despite the severity of the Great Recession, very few workers experienced wage cuts. These numbers edged up only slightly from 2006 to 2011. Finally, and perhaps most interestingly, the percentage of workers who received wage increases dropped notably in 2011 compared with 2006. This compression of wage increases resulted in a larger spike at zero. Read The Path of Wage Growth and Unemployment here .
  • SF Fed: Impact of Discouraged Workers Rejoining Labor Force on Unemployment Rate

    Take a look at the trend line for the percentage of Americans who are not currently looking for work but who want jobs, from a new Economic Letter by San Francisco Fed researchers Mary Daly , Early Elias , Bart Hobijn , and Òscar Jorda : There is a clear growth of what the Bureau of Labor Statistics terms "discouraged workers" since the recession. These workers do not count against the unemployment rate. So as we get set to begin another year of watching monthly job reports closely, we need to be aware of how a positive trend of these Americans returning to the workforce will affect the unemployment rate. Nearly 6.9 million people report being out of the labor force but wanting a job. As economic conditions improve, it is reasonable to expect that some of these workers will move back into the labor force or join for the first time. Based on historical averages, about 2.1 million of them could enter the job market. These potential entrants will either take jobs directly or join the labor force as unemployed workers actively searching for jobs. The near-term path of unemployment will reflect both how quickly potential workers enter the labor force and the rate at which jobs are created. Assume that the average pace of job creation over the past two years continues. We can then project the path of the unemployment rate over the next year according to the rate at which the 2.1 million potential workers enter the labor force. If these workers take a year and a half to join the labor force, which would be about a year faster than the entry rate from 1994 to 1999, the recent decline in the unemployment rate would stall at more than 8% by the end of next year. Suppose though that the number of workers who want a job but are not actively looking falls at a more moderate pace and it takes three-and-a-half years for this group to join the labor force. In that case, the unemployment rate would stay at 7.7% through the end of next year. For comparison, if none of the 2.1 million potential workers were to enter the labor market, the unemployment rate would fall to 7.4% by the end of 2013. Of course, the rate at which these workers join the labor force may reflect the labor market’s overall strength. A faster rate of job creation may offset a faster rate of labor force entry, allowing the unemployment rate to fall. Read Will the Jobless Rate Drop Take a Break? here .
  • SF Fed Economic Letter: Wage Rigidity and Wage Growth

    In a new Economic Letter , San Francisco Fed economists Mary Daly , Bart Hobjin , and Brian Lucking take a look at wage growth. Wage growth has been strong compared to the overall rate of recovery and growth of GDP in the US. So what is to explain this growth? Daly, Hobjin, and Lucking provide one quick answer: One reason real wage growth has been so solid is that inflation has been low, with the personal consumption expenditures price index increasing at an average annual rate of 1.8% since the start of 2008. Low inflation means that employers cannot reduce real wages simply by letting inflation erode the value of worker pay. Instead, if they want to reduce real labor costs, they must cut the actual dollar value of wages. Employers generally avoid doing so because cuts to nominal wages can reduce morale and prompt resistance even in difficult economic times (Kahneman, Knetsch, and Thaler 1986). The inability or unwillingness of employers to reduce nominal pay is known as downward wage rigidity. When economic conditions are poor, this rigidity can disrupt normal labor market functioning, especially in a low-inflation environment. If wages are downwardly rigid, workers may receive false signals about the value of remaining in a particular occupation or industry. For example, consider construction workers who are less productive now than they were five years ago because of the bursting of the housing bubble. If their wages fell, they might seek jobs in other industries. Because of downward wage rigidity, they may stay in construction instead. On the labor demand side, employers that can’t cut wages may delay expanding payrolls as conditions improve. Either way, downward nominal wage rigidities can result in misallocation of resources in the economy. Read Why Has Wage Growth Stayed Strong? here .
  • SF Fed's 'Economic In Person' Series: The Great Recession and Unemployment

    One key legacy of the Great Recession will be the damage it caused to the labor market, says Mary Daly . That damage is deep and wide. And it only just begins to show up in the stats discussed in the media. In the first installment of a new series from the Federal Reserve Bank of San Francisco , Daly--Associate Director of Research and Group Vice President at the bank--discusses four distinguishing characteristics of the recession and its impact on unemployment. frbsf on Broadcast Live Free