The share of income claimed by the top 1, 5, and 10 percent of Americans has increased significantly since the 1970s. In addition, the United States has less upward mobility from one generation to the next than many European countries do, raising concerns about the nation’s commitment to equal opportunity. Access to higher education can play a role in countering these trends, and many colleges and universities are committed to access — but increasing income inequality is itself creating significant challenges for higher education.
A variety of factors have been blamed for the increasing income inequality. Claudia Goldin and Lawrence Katz, economists at Harvard, argue that there is a shortage of the skills needed as a result of technological change, and so skilled workers are in high demand and earn more money, thereby increasing the income divide between those with and without skills.
Others suggest that income inequality has more to do with the power and ability of those with money to influence the political process for their own economic benefit. Government clearly plays a role, with decisions about monetary and fiscal policy — including federal and state tax and expenditure policies, responses to recession and unemployment, and policies toward unions and minimum-wage rates — all affecting the distribution of income.
Whatever the causes, access to higher education can contribute to reducing income inequality and to improving socioeconomic mobility from generation to generation. Current research suggests that having a four-year college degree increases lifetime earnings by about 65 percent over having only a high-school degree. And a greater supply of those with college degrees in the labor market would put downward pressure on the skills premium. Earning a college degree also makes it much more likely that someone born into the bottom income quintile will move into higher quintiles.
Yet educational attainment appears to be stalling, and college attendance is still determined too much by income and race. While 44 percent of whites and 59 percent of Asian-Americans ages 25 to 64 have a higher-education credential, only 28 percent of blacks, 20 percent of Hispanics, and 23 percent of Native Americans do. And 82 percent of students in the top third of the income distribution go to college, versus 54 percent in the bottom third. College completion has increased across all income levels since the 1960s, but the gap between those in the lowest quintile and the highest quintile has also grown.
Colleges can play a role in countering these trends by increasing the socioeconomic diversity of their student bodies, educating more students from low- and middle-income families. This includes the selective, private nonprofit colleges and universities, most of which have equal opportunity as part of their missions. Yet the trend of increasing income inequality is exacerbating the challenges facing these institutions, making it more difficult for them to recruit a more socioeconomically diverse student body.
This is because higher-income families have done quite well over the last three to four decades and are willing and able to pay a higher price for the type of education they desire for their children. Colleges compete for these students, responding to their demands for a variety of services, from small classes with talented faculty to turf fields, which pushes up costs. These students have also had significant resources invested in them from birth through high school, so they are attractive admissions candidates.
We know that many low- and middle-income students do get through high school with the skills and education needed to be admitted and do well at selective colleges. Talented low- and middle-income students are out there, but research has shown that too few are applying to and matriculating at top institutions.
While many colleges would like to attract and admit those students, their families’ incomes have lagged behind the top groups because of increased income inequality. That means that colleges committed to recruiting and educating a socioeconomically diverse student body have to find additional financial-aid resources to make it possible for these students to attend.
What if income inequality in the United States had remained at levels from the 1970s rather than increasing as it did over the following four decades? Using data for a group of very selective colleges and universities, I attempted to figure it out. My findings, which will be published in the forthcoming issue of Education Finance and Policy, suggest that if income inequality had not increased over the last four decades, there would have been significantly less pressure on institutions to increase spending to attract students from high-income families since their incomes would have increased by much less.
Because disadvantaged families’ incomes would have been higher, they would have needed significantly less financial aid to attend these colleges. Greater income equality over the last four decades would have resulted in lower increases in tuition, lower increases in costs, and lower increases in the need for financial aid. My research shows that tuition, costs, and financial aid all would have been lower by about 10 to 20 percent. While these estimates are rough, they suggest that rising income inequality has not been inconsequential in the challenges that we see facing many institutions and low- and middle-income families.
Colleges have been criticized for rising costs and rising tuition, and many experts believe these trends, along with the subsequent rise in financial aid, are unsustainable. But these are in part a result of increasing income inequality in America. The government is in the best position to directly address these trends, through macroeconomic, tax, and expenditure policies. Changes in minimum-wage policies and greater support for unions on the part of the government could also play a role.
At the same time, the government allocates significant resources to higher education, and those subsidies, grants, and special tax treatments should be more focused. Colleges would do more to improve low- and middle-income access if doing so was required to get government money.
Absent changes in policies, income inequality is likely to continue to increase in America. This will create additional challenges for institutions of higher education as we try to attract students from all family-income levels and contribute to economic opportunity under increasingly difficult circumstances.
