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Increased demand for skilled workers has created wage inequality between those who have college degrees and those who don’t in the United States, but the news isn’t all bad, according to Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics. “There are two sides to the growth in the price of skill,” Murphy said. “The first thing you see is an increase in inequality. Most people regard this as a bad thing. But number two, when the skill price rises, there is an increase in the return on human capital. And that’s a good thing.”
Murphy spoke to nearly 200 students April 5 at the Brown Bag lunch discussion hosted by The Becker Center on Chicago Price Theory at Hyde Park Center sponsored by Vishal Verma, ’07 (XP-76).
According to Murphy, the market response to a higher premium on skill will always be an increased supply of skilled workers. “Increase in supply of skilled workers is going to help check the growth in inequality,” he said. “That’s important. When you have a rise in demand for skill, prices rise. More people start getting educated. That’s going to help control the growth in inequality.”
This apparent “balancing act” between supply and demand of skilled workers occurred throughout the 20th century, he said. “In fact, it’s been going on for a long time,” Murphy said. “Skill demand rises and supply goes up to meet that demand. You see fluctuations in the price of skill.”
Murphy recommends neither a progressive income tax increase nor a tax on college to address the inequality. Rather, he believes the market should be left to correct itself. “I like to bring this back to some notion of investment in skills,” Murphy said. “If you don’t follow the investment-in-skill route and you say, ‘I’m going to reduce inequality by raising taxes on high-income people,’ you’re just running in the face of the reality that the demand for skill has risen. With more demand for skill, the logical response is to have more skilled people. That’s what’s going to happen if you can somehow work on the supply side.”
Policy makers must remember that inequality represents a price, he said. “Wage differentials represent the price of something,” Murphy said. “They’re not just luck of who gets what. They have a lot to do with prices. The market is telling us that the demand for skill is up. The best response to more demand is an increase in the quantity of supply. If we have more demand for skill, the smartest thing—from the point of making us richer as a country and worldwide—is to have skill grow in response to the growth in demand. Other approaches to addressing the issue reduce our ability to take advantage of the higher return in human capital.”
Nonetheless, important issues related to the inequality in wages should be examined, Murphy said. Among them are the lag in the number of college graduates behind the growing number of people going to college and the increased consequences of poor preparation for the labor market, he said. “It’s a good to work on supply by both improving schools and young child preparation, but not just for people at the top because you can’t have a big fraction of your population unable to move forward in today’s world.”
—Phil Rockrohr
