Wednesday, November 16, 2011

Does Harvard Cause Income Inequality?

Staring in the 1980s, labor economists wrote thousands of empirical papers documenting the rising return to skill. If schools such as Harvard supply such skill, then "Higher Education" is a cause of income inequality as it leads to a separation of top workers from the rest.

But, this Crimson article makes a new point.


To quote the author;  "Harvard’s true culpability lies in its complicity in the “brain drain” into finance and consulting, fields that produce very little and in fact leech off of other industries. These jobs are prestigious and lucrative, which explains why they are especially tempting for Ivy League types.
Here is one way that Harvard can solve both problems: abolish tuition as we know it in favor of a garnishment of future wages. This would instantly wipe away Harvard’s (already mistaken) reputation as a prohibitively expensive school available only to a wealthy elite as well as its habit of sending its brightest graduates into professions that revere avarice."
Now, I know that we need new jobs in the United States but who will be the Dean of Avarice who monitors each graduates' earnings and then demands 5% of this amount?  Will graduates be on the Honor System to self report their earnings?
To be serious for a moment,  I have wondered whether Economics Ph.D. programs are attracting the same talent that they attracted 30 years ago, or 20 years ago before the rise of  Superstar pay on Wall Street.   Given that Ph.D. programs have become much more International, you would expect that the quality of students should be rising because there is more competition.  For evidence, don't forget this funky JPE paper on track and field records and globalization.   
Has "too much" talent gone to Wall Street?  If we believe the human capital externality models of Lucas, and Romer and the empirical work conducted by Glaeser and Moretti and others then there could be significant social costs from individually rational occupational choice decisions.   I haven't seen an academic paper on the "Cost of Wall Street" that its rise could simultaneously increase income inequality and lead to a misallocation of human capital (i.e too many Ivy Leaguers betting on asset price dynamics).
Harvard's culture may also accelerate this occupational choice.  If the "Social Network" at Harvard stresses the importance and  "coolness" of high early pay and the possible quick sugar pot, then there may be young people there who choose to go to Wall Street rather than becoming a nerd Professor.  Now, I am a full supporter of allowing the price system to send signals of what is scarce but there is an interesting question of how the "best and brightest" choose where to start their career and the role that Superstar Pay plays in directing talent.

2 comments :

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jamesnwally said...

This is good post about the Harword and Inequality about the income. The author make good counter balance of both topic.

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