The Major pay gap

Every semester in my "Principles" class, I perform a cost-benefit analysis to show that despite the big increase in tuition over the past few decades, the financial benefit of having a college degree relative to a high-school diploma still outweighs the cost, and not by a little. However, I also make a point that the financial benefit depends crucially on what you choose to major in. A recent article by CBS News confirms this and lists the Majors whose holders are expected to earn the highest salary from the beginning to the mid-point of their career. The two conclusions I find most interesting are these:

1. Economics (grouped with Mathematics) is the only social science Major that makes it to the group of top-earning majors. This is not surprising to those of us who teach the subject. As one researcher comments,

When we ask employers about skills that are lacking in new college grads, we thought it would be technical skills. But what we hear from employers is often the new hires right out of college are lacking things that you think everyone in college should graduate with, which are communication skills and critical thinking.

The issues that economists deal with often have costs and benefits (there is no such thing as a free lunch, right?) and are the focus of political debate. Hence, a training in economics certainly encourages and cultivates critical thinking. Elaborating these costs and benefits in a way that other people can understand also hones communication skills. As most economic theories are formulated as mathematical models, a training in economics also cultivates abstract and analytical thinking and sharpens the students' quantitative skills. These are all qualities that employers value.

2. The highest-paying Majors are all in STEM fields, which explains a big part of the gender pay-gap since these fields are dominated by men. Of course, the issue remains whether women choose voluntarily to pursue careers in lower-paying fields like the arts or education or whether they are steered in this direction by societal gender norms. However, this is a different and more difficult question to answer.

Discrimination and Disparities, by Thomas Sowell

While there are several books on discrimination as well as inequality, this one by Thomas Sowell matters much for two reasons. The first reason is that Sowell has a remarkable academic background that includes a B.A in Economics from Harvard, an M.A. in Economics from Columbia, and a PhD in Economics from University of Chicago. As well, aside from his monographs and articles, he has a respectable peer-reviewed publication record in such high-ranking journals as The Journal of Political Economy and The American Economic Review.  The second and perhaps most important reason, given the topic of the book, is Sowell's personal background. He is a black man who spent his early childhood in the segregated south and with limited financial means. Here is part of his biography from goodreads

Sowell was born in North Carolina, where, he recounted in his autobiography, A Personal Odyssey, his encounters with Caucasians were so limited he didn't believe that "yellow" was a hair color. He moved to Harlem, New York City with his mother's sister (whom he believed was his mother); his father had died before he was born. Sowell went to Stuyvesant High School, but dropped out at 17 because of financial difficulties and a deteriorating home environment. He worked at various jobs to support himself, including in a machine shop and as a delivery man for Western Union. He applied to enter the Civil Service and was eventually accepted, moving to Washington DC. He was drafted in 1951, during the Korean War, and assigned to the US Marine Corps. Due to prior experience in photography, he worked in a photography unit. After his discharge, Sowell passed the GED examination and enrolled at Howard University. He transfered to Harvard University, where he graduated magna cum laude with a Bachelor of Arts degree in Economics. He received a Master of Arts in Economics from Columbia University, and a Doctor of Philosophy in Economics from the University of Chicago.

While Sowell has a free-market perspective, and in my opinion sometimes exaggerates to make his case, Discrimination and Disparities is very well thought-out, and makes some excellent points backed by both economic theory and the data. It is a must-read for anyone who is interested in the topic and is open to having their thoughts provoked. Below are some points on a few of the issues Sowell deals with in the book.*

ON PROFILING:
Information is not costless. People seek to economize on information cost. In doing so, they tend to substitute less expensive forms of information for more expensive forms. Physical attributes are “cheap” to observe.

ON MINIMUM WAGE:
A wage rate set above where it would be set by supply and demand in a competitive labor market will cause chronic surplus of job applicants. There will be a surplus of qualified black job applicants as well as qualified white job applicants. Under such circumstances, the cost of discrimination to the discriminating employer will fall. The discriminating employer may decide not to hire black job applicants. Minimum wage laws cause the overall youth rate of unemployment to rise and will particularly hurt the young minority job seekers: “what is particularly striking is that there was no significant difference between the unemployment rates of black and white teenagers in 1948”. Between 1940 and 1960, before the great expansion of the welfare state, black poverty rate declined significantly.

ON INEQUALITY:
At some point between ages of 25 and 60, over three-quarters of the population will find themselves in the top 20 percent of income distribution. The turnover rate in the highest income bracket is particularly high. Fewer than half the people in the “top one percent” in income in 1996 were still there in 2005. The highest incomes are usually very transient incomes, reinforcing the conclusion that these are transient capital gains rather than enduring salaries. And most of “the poor” are not permanent residents in low-income brackets. It is important to note that “the poor” are not a given set of human beings, but an ever-changing mix of people. Entry -level jobs are, therefore, not necessarily “dead-end jobs”.
Despite equal numbers of households in each 20 percent, there are far more people in the top 20 percent of households. The number of people participating in the labor force and earning income is four times as great in the top quintile as in the bottom quintile.

ON “THE POOR PAYING MORE”:
While prices are higher in inner-city neighborhoods, rates of profits are generally lower.  The community is actually paying additional costs generated by some residents in that community. The local residents who created none of those costs are victims of those who did.

*The points were summarized and kindly provided by my colleague, Massoud Fazeli.