Real wage inequality

by Russ Roberts on March 12, 2009

in Inequality

About half of the return to a college education over and above that of a high school education, is eaten up by higher costs of living—college grads tend to live in high wage but high cost urban areas. So says this working paper by Enrico Moretti (HT: Peter St. Onge). He recognizes that the higher costs of living are partly because of higher amenities in urban areas. Clever insight. Might be important.

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ardyan March 12, 2009 at 10:44 pm

I guess working at a mcdonald's in texas isn't as bad as one would think.

Ray G March 13, 2009 at 12:10 am

I don't live there anymore, but one of the best places to live that has enough of both small and large is Evansville, IN.

The only valid complaint all of the transplanted New Yorkers and New Englanders have is that it lacks the kind of character that one finds in those places. Your favorite pizzeria, etc.

Andrew_M_Garland March 13, 2009 at 12:11 am

I wonder, what is the actual value of a college education, after correcting for these effects.
(1) Colleges select for high IQ
(2) Businesses select for IQ by requiring a college degree for executive-track training.
(3) There is a cultural belief that a person cannot succeed without a college degree, limiting the success of non-grads.

Employers and schools often dismiss the value of earlier college training, even in the case of future doctors and lawyers. The college education is regarded as an indication of dedication and interest. But, the employer or graduate school implies that the student should "forget what you have learned" and start to learn the real subject, if he can.

So, a college degree may be valuable mostly because of cultural bias, the lack of a more efficient and cheaper alternative, or the prohibition against employers giving aptitude tests (via supreme court rulings). How much does the "learning" in college really matter?

College is an Expensive IQ Test

Gil March 13, 2009 at 12:54 am

I alway have a this conspiracy theory where those who didn't listen to their parents omen of "do good in school and go to university and a good degree so you can get a good job" and instead dropped out early, learnt a trade and earn just as good as money (and in some cases better than) those who did bother to study will every now and then engage in a deep, sinister laugh at the tertiary eductated. (The one that goes like "Muhahahahahaaa!")

SheetWise March 13, 2009 at 2:01 am

Taleb writes about the cost of cities and the perceived value — the networking effect. I think it's really more of a limelight effect.

My personal experience leads me to believe that most people leave school, begin earning, and stop learning anything that doesn't enhance their earnings. I'm sure you could search out the exceptions anywhere — and probably easier in NYC than anywhere else — but it's a trade-off.

I prefer a small town with a vibrant college where I can mix with both professors and students. The great cities of the world are so cheap to rent that I can't imagine why anyone would want to pretend that they own a share.

vikingvista March 13, 2009 at 2:18 am

Bob and Bill are twins.

Bill was always a fun-loving guy. But he had a bit of a fatalistic attitude and his goal was to get the maximum enjoyment out of a short life. He partied through high school, and afterward took a solid but low stress job, so that he had plenty of time to enjoy family and friends.

Bob took the nerd route. He studied hard through high school, college, postgraduate studies, and an apprenticeship. He wasn't able to get started on his career until about 15 years after Bill, and in the meantime had not only accumulated a lot of debt, but had forgone all those years of income and compounded savings. He had a lot of catching up to do in his retirement account. Bob was also quite a bit older than Bill before he started his family, but fortunately he wasn't hit by the proverbial (or literal) bus before reaching his long-delayed gratification.

But Bob's 33rd birthday was a good one. He successfully completed his training and landed a high paying job–though this came as no surprise to anyone, since that is what usually happened to those who made the same sacrifice.

That was the same year Bob got to experience a very momentous Presidential election. He tuned in to listen to the President's historical words:

"Those whose incomes are in the top 5% are going to pay for their excesses of the past 10 years with a large tax increase. We will use that money to send out 'tax rebates' to the other 95%"

It took Bob 20 years to realize that Bill was the smart one.

Colin Keesee March 13, 2009 at 9:02 am

As a recent college grad in Economics, this is of interest to me. After looking at the paper though, a major error jumped off of the page. It does not take into account subjective valuation.

I grew up in and went to high school in the suburbs of Los Angeles and if you are over 25, without a bachelors degree, working in a lower wage job and still living with your parents, unable to afford your own home here (so you move to Arizona or Neveda) or are already married and struggling to rent an apartment in the town, you "suck," you are a failure in the eyes of the community.

On the other hand if you have that degree, you wear a suit and tie to work and can afford an apartment near the Los Angeles sky line, you have made it or at least you are on the that path.

While the household budget of the college grad may only be marginally better than the non college grad, having that Los Angeles address is something people in our suburban town really value.

Is it rational or fair that our community judges its young adults on where we live? It probably is not but that is subjective valuation. In other words, you cannot put a price on the high wage-high cost of living lifestyle in the city that so many of my town's young people seek to obtain.

I am surprised that an Austrian blog would pay so much attention to a paper that seems to pay little attention to subjective valuations.

jb March 13, 2009 at 9:20 am

"Clever insight. Might be important."

Say that with a gravelly voice, and you'll be channeling Rorschach.

CRC March 13, 2009 at 10:22 am

vikingvista, I was waiting for the punchline and you did not disappoint. :-)

LowcountryJoe March 13, 2009 at 11:10 am

Bob and Bill were really triplets. The third brother's name was George.

And, Bob, well Bob really went on to study medicine. Rather than becoming an apprentice, he began practicing medicine.

Bill is really just the same guy that was mentioned earlier but George is the strange and shifty-eyed one. George is like an ugly DUCKling in the family but he's also quite the story-teller (though a misguided one). George frequently impersonates his successful brother Bob (the real M.D.) on Internet message forums spouting some such nonsense about backward-assed African countries being Laissez-faire, human beings being responsible for all climate patterns and changes, and writing stuff about income discepancies (whatever the hell that's supposed to mean)

Anyhow, George has a love/hate relationship with Bob: he wants to be just like him yet despises him for being successful and earning the money that the marketplace has determined that Bob's worth. George is the type of brother who's intentions would be noble if he were to stop being such a poser and would be willing to front his own money to affect change rather than assume that he'd be a better steward than those that actually go out and earn it or already possess it.

It's a great story, VikingVista, but I just thought that you'd like to, as Paul Harvey might have said, hear the rest of the story.

Seng March 13, 2009 at 11:14 am

I was duped by the system into taking out $82,000 in loans at a good state university, leaving me with a hefty mortgage-sque payment every month for it. This is all for a piece of paper that says I learned a bunch of stuff I could have easily learned from wikipedia in a matter of weeks. College was fun socially, but not worth what it costs by a long shot. Subsidizing higher education further will only push the costs further away from reason.

True_Liberal March 13, 2009 at 11:15 am

Thank you CRC for beating me to the punch!

At the other end of the socioeconomic spectrum: Why is a national minimum wage law a good thing? Surely a burgerflipper in East Keokuk has a lower cost of living than one in Big Apple or LALAland. It's highly artificial to mandate the same pay for both.

Kevin March 13, 2009 at 11:19 am

jb I thought the same.

Ardyan, I don't know how bad one would think it is to work at a McDonalds in TX, but I suspect that most people would be surprised at the level of consumption an exurban/rural family can achieve on very low wages. This leaves aside the issue of whether a person working at McDonalds can self-actualize as a fry-cook with very little net worth, but the level of consumption itself is really a powerful indicator of mankind's (and America's) fundamental increase in material wealth.

Hydra March 13, 2009 at 11:28 am

"the higher costs of living are partly because of higher amenities in urban areas."

if they are amenities, then the cost should be optional and not part of the "cost of living".

The opera is an amenity, but if you don't buy tickets to the opera how is that part of your cost of living unless the opera is subsidised through your taxes or something?

If the costs are really part of your cost of living, like the subway, then how is that an amenity?

Cities cost more, but whether you really get more is subjective.

vikingvista March 13, 2009 at 11:42 am


Thank you for filling in the rest of the story. It is also interesting to note that George told Bob:

"You need to give back for the success afforded to you by this government and this society."

Bob replied,

"What exactly did this government or this society give to me that it did not also give to you in equal measure? Nothing, my brother. It would seem your debt and my debt to society should be exactly the same. What you are really penalizing me for are my good decisions, which you also had equal opportunity to make. You just prefer the easier road of taking, rather than earning."

Such is the meaning of "economic justice", which is really just another cynical form of injustice.

Paul McLellan March 13, 2009 at 2:08 pm

Isn't this just saying that in areas where a lot of well paid people live the cost of living is driven up because well paid people live there and so they drive up the cost of housing (which is probably the only thing that is really a lot more expensive in these areas).

vikingvista March 13, 2009 at 2:37 pm

"cost of living is driven up because well paid people live there"

Exactly. Costs are higher because demand is higher because valuation is higher. It is unfair for governments to try to make up for differences in the costs of living. New Yorkers are perfectly free to move to places like Texas, Utah, or Idaho, so there is no reason for those places to be made to subsidize people who choose the NY lifestyle or to subsidize bad NY government and their high taxation.

In short, if a New Yorker is truly envious of the low cost of living in Lubbock, he can move there.

vidyohs March 13, 2009 at 3:02 pm

The Daily Mail (UK) wrote this editorial about Obama on 1/6/2009. (Confirmation, Google "London Daily Mail Obama's Victory")

Obama's Victory–A British View

A victory for the hysterical Oprah Winfrey, the mad racist preacher Jeremiah Wright, the US mainstream media who abandoned any sense of objectivity long ago, Europeans who despise America largely because they depend on her, comics who claim to be dangerous and fearless but would not dare attack genuinely powerful special interest groups. A victory for Obama-worshippers everywhere.

A victory for the cult of the cult. A man who has done little with his life but has written about his achievements as if he had found the cure for cancer in between winning a marathon and building a nuclear reactor with his teeth. Victory for style over substance, hyperbole over history, rabble-raising over reality.

A victory for Hollywood, the most dysfunctional community in the world. Victory for Streisand, Spielberg, Soros, Moore, and Sarandon. Victory for those who prefer welfare to will and interference to independence. For those who settle for group think and herd mentality rather than those who fight for individual initiative and the right to be out of step with meager political fashion.

Victory for a man who is no friend of freedom. He and his people have already stated that media has to be controlled so as to be balanced, without realizing the extraordinary irony within that statement. Like most liberal zealots, the Obama worshippers constantly speak of Fox and Limbaugh, when the vast bulk of television stations and newspapers are drastically liberal and anti-conservative. Senior Democrat Chuck Schumer said that just as pornography should be censored, so should talk radio. In other words, one of the few free and open means of popular expression may well be cornered and beaten by bullies who even in triumph cannot tolerate any criticism and opposition.

A victory for those who believe the state is better qualified to raise children than the family, for those who prefer teachers' unions to teaching and for those who are naively convinced that if the West is sufficiently weak towards its enemies, war and terror will dissolve as quickly as the tears on the face of a leftist celebrity.

A victory for social democracy even after most of Europe has come to the painful conclusion that social democracy leads to mediocrity, failure, unemployment, inflation, higher taxes and economic stagnation. A victory for intrusive lawyers, banal sentimentalists, social extremists and urban snobs.

Congratulations America!! Your funeral will be sooner than you think!!

Methinks March 13, 2009 at 3:27 pm

"cost of living is driven up because well paid people live there"

It's a chicken and egg thing. People tend to flock to jobs, bidding up the price of real estate. If it's a major financial center like New York, then those jobs are very competitive and the pay to attract professionals increases. New York in particular has two other problems with regard to the cost of living. It is an island, which limits the supply of living space and makes commuting hellish. It is also chock full of social engineers and every welfare program known to man. I actually know people who moved to New York specifically to take advantage of the welfare state. To pay for all these goodies, property taxes and income taxes are enormous. Of course, this means that to compete for workers, companies have to pay more.

people who work for financial institutions in basically the same jobs outside the NYC area generally make significantly less. So, if the New Yorker favours the cost of living in Lubbock, he'll have to accept lower compensation as well. Of course, it's pretty hard to imagine that he won't be able to improve his standard of living since making $123,322 in Manhattan is roughly equivalent to making $50,000 in Houston and I think that's probably being generous to NYC.

The Other Eric March 13, 2009 at 3:32 pm

Vidyohs, thanks for this.

I may print t-shirts with "Vote for a Democratic Congress: Victory for those who prefer welfare to will and interference to independence."

Methinks March 13, 2009 at 4:09 pm

Thanks for posting that, Vidyohs! That editorial says it all.

MnM March 13, 2009 at 4:32 pm


It came from Toronto originally.

vidyohs March 13, 2009 at 5:52 pm

What can I say, MnM? I checked its pulse not its parentage.

Richard March 13, 2009 at 7:04 pm

A willingness to work (labor), and knowing how to work is at least as valuable as a college degree.

Crusader March 13, 2009 at 7:21 pm

Richard – the ability to get a good college degree is a function of how lucky you were born.

f(rich parents) = college degree from Ivy league school

MnM March 13, 2009 at 8:25 pm

Haha, well played, Vid.

vikingvista March 13, 2009 at 8:31 pm


I can PROMISE you that you can get an education from a run-of-the-mill big 10 university (or one of the many outstanding non-ivy league private universities) and wind up with far greater wealth than most ivy league graduates–if you make the right choices and perform well.

I don't want to denigrate ivy league, but their biggest advantage is in selecting people who can perform. This gives you a step up the year after graduation, but after a year of demonstrating your performance or lack thereof, almost nobody will give a damn.

Most of those same ivy league strong performers could've saved their money, gone to a decent public university and ultimately come out ahead financially.

My point is this–unless you are going into politics or looking for a job on Wall Street, there is NO reason to be discouraged, envious, or cynical about not going ivy league. It does not have to hold you back, and you may very well be better off without it.

In fact, unless you are wealthy, I wouldn't recommend it, because I doubt you will get back your investment, compared to many much less expensive alternatives.

maximus March 13, 2009 at 10:52 pm

"the ability to get a good college degree is a function of how lucky you were born.

f(rich parents) = college degree from Ivy league school"

Your being funny right?

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