A college degree is worth less if you are raised poor

People with more education have higher earnings. Boosting college education is therefore seen by many—including me—as a way to lift people out of poverty, combat growing income inequality, and increase upward social mobility. But how much upward lift does a bachelor’s degree really give to earnings? The answer turns out to vary by family background.

Degrees of dissimilarity

If you are among the fortunate few who grow up poor and manage to earn a bachelor’s degree, you might reasonably expect your earnings potential to rise by the same proportion as that of other people who earn a bachelor’s degree. Your actual level of earnings may not match others, but the percentage increase, relative to a high school diploma, ought to be comparable. This is certainly the case in terms of gender and race. Many economists assume this pattern holds for those from different backgrounds in terms of income, too.

Wages are lower for BA holders raised on low incomes

But it turns out that the proportional increase for those who grew up poor is much less than for those who did not. College graduates from families with an income below 185 percent of the federal poverty level (the eligibility threshold for the federal assisted lunch program) earn 91 percent more over their careers than high school graduates from the same income group. By comparison, college graduates from families with incomes above 185 percent of the FPL earned 162 percent more over their careers (between the ages of 25 and 62) than those with just a high school diploma:

Hershbein 21916001

As the chart shows, this earnings gap between poor and non-poor college graduates also widens as time passes. Bachelor’s degree holders from low-income backgrounds start their careers earning about two-thirds as much as those from higher-income backgrounds, but this ratio declines to one-half by mid-career. For individuals without a post-secondary credential, the pattern is less marked. Those from low-income backgrounds initially earn 80 percent as much as those from a higher-income background, dropping to 70 percent by mid-career.

Explanations and implications

What’s behind this rather startling gap? There are a host of possibilities, from family resources during childhood and the place where one grew up, to the colleges that low-income students attend. My colleagues and I are currently investigating and weighing these and other factors. We are also looking to see if our overall findings hold up in other data sets and time periods.

If a college degree is not the great equalizer we hoped, strategies to increase social mobility by promoting post-secondary education will fall short. A more comprehensive approach may be needed.

Note on methodology:

My colleagues and I examined career earnings profiles for people with different levels of education (completed by age 25), using the Panel Study of Income Dynamics, a survey that has tracked the same people and their descendants for nearly 50 years. We observe individuals’ lifetime earnings and their parents’ earnings when the same were in high school. To compare earnings across career years and obtain a “present value,” we apply a 3 percent annual discount rate, so that all earnings are relative to age 18. Profiles shown in the graph are fitted values from a regression of earnings on a quadratic in potential experience (age – years of schooling – 6) and survey year dummies. “BA+” includes bachelor’s and higher degrees; “HS+” includes those with a high school diploma or 12 or 13 years of schooling. Results for those with associate’s degrees are similar (not shown).

Editor’s note: Read Brad Hershbein’s companion piece outlining possible causes of the earnings gap outlined here.