In today’s economy, a college degree is more important than ever. Not only does it help graduates land that first job, but it can ensure that they earn more over their lifetime as well.
A new model—developed by economists Mark Huggett of Georgetown University, Gustavo Ventura of Arizona State University, and Amir Yaron of the University of Pennsylvania’s Wharton School—shows just how important it is for young adults to be well prepared for the working world. The model demonstrates that variation in lifetime earnings and wealth is largely determined by skills acquired by age 23.
“Growing income inequality is a phenomenon in almost all developed and postindustrial nations,” says Dewayne Matthews, vice president of policy and strategy at the Lumina Foundation. “It’s an issue of great concern not just in the United States but in Western Europe and Asia and other countries.”
In developing their model to assess lifetime earnings, the economists set out to answer two questions: How important are the conditions experienced early in life? And what are the most important conditions? They chose age 23 as their starting point—an age when most people have completed their schooling and become independent from their families. The economists looked at three measures for a person at that age: his or her human capital, learning ability, and current financial wealth.
Not only did they find that conditions at age 23 accounted for 60 percent of the variation in lifetime income and wealth, they also discovered that out of the three initial measures, human capital was by far the most important. Earlier economic models assessing lifetime earnings hadn’t accounted for the human capital part of the equation—that is, acquired skills and knowledge that have value in the job market. Earlier models also put more emphasis on the economic “shocks” experienced by a worker throughout life—the bumps in the road that affect income.
Although the economists did not look specifically at the factors that build human capital early in life, their results do shine a light on the importance of education. “It appears that educational success or attainment is a huge factor in the inequality,” Matthews says. “This [paper] looks at it from the point of view of the individual, but it is also true writ large that it has great social impact as well.”
Matthews cautions that the results don’t diminish the importance of continued education throughout adulthood, since the rapid pace of technological change requires workers to acquire new skills constantly. But because relatively few adults complete postsecondary education after age 40, the level of education attained by the mid-20s does seem to carry forward throughout life, he says.
Rory O’Sullivan, policy and research director for the advocacy group Young Invincibles, sees a hopeful message in the study. “It means that getting an education is more important than luck. … If we can figure out the right ways to make sure that the rising generation can get through school and get their degrees, you can be pretty sure they will be successful. It’s not up to the winds.”