I show that evidence from cross-city comparisons is remarkably consistent with recent findings from aggregate time series data. Both designs provide support for three key conclusions: (1) workers with below high school education are perfect substitutes for those with a high school education; (2)”high school equivalent” and “college equivalent” workers are imperfect substitutes; (3) within education groups, immigrants and natives are imperfect substitutes. Together these results imply that the impacts of recent immigrant inflows on the relative wages of U.S. natives are small.
This is from his prestigious Ely Lecture at the American Economic Association meetings early this year.
What struck me was the first finding, that workers with high school education are perfect substitutes for workers with less education. Although that finding may help prove the point that Card is making here, it is a finding that otherwise will cause lots of mischief.
[UPDATE: the first commenter points out my error. “perfect substitutes” does not mean that they can substitute one for one. So high school graduates could earn more than dropouts and still be perfect substitutes for one another.] –It says that the value added of finishing high school is zero (unless you go on to college). [UPDATE–this is wrong. In Card’s sample, high school graduates earned about 20 to 25 percent more than dropouts, depending on the year of observation.]
–It implies that the linear “earnings function” in which wage rates rise monotonically with years of schooling is bogus. [UPDATE–this is probably wrong also. But if there is a monotonic earnings function, then treating all dropouts as identical is a potential source of noise in Card’s data.]
–It raises questions about the validity of the claim of Claudia Goldin and Lawrence Katz that early adoption by the United States of mass high school education greatly improved the productivity of our labor force. [UPDATE–this is wrong, but it would suggest that the relative supply of dropouts and high school graduates does not affect their relative wages]
I thought that the conventional wisdom was that finishing high school makes a difference. I thought that there was even a “sheepskin” effect from completing the last month of high school. It seems to me that Card’s finding of perfect substitutability between high school graduates and workers with less education should have sent shock waves through the economists at the AEA. Maybe that is what happened, and I just missed it because I wasn’t there. [UPDATE: Again, this is wrong]
READER COMMENTS
Steven McMullen
May 26 2009 at 7:37pm
Interesting finding, but as to your allegations of mischief, probably not:
Saying that high school graduates and HS dropouts are perfect substitutes is not the same as saying that the return to a high school diploma is zero. Instead it is saying that they can always be substituted in some ratio – and the ratio does not have to be 1:1. The high school graduates might still be more productive at the same work and get paid more. This is what most of our empirical evidence indicates.
The important point is that high school graduates and dropouts are not easily substituted for college grads in some aggregate production function, in fact some evidence indicates that they might be complementary.
As for the second bit of mischief, no one really believes that the effect of education is linear.
Finally, while it might “raise questions” about Katz and Goldin (if you misunderstand perfect substitutes), it is quite possible that the structure of the economy (think aggregate production function) has changed since the time period in which huge gains were made in HS education. You could easily tell a story similar to theirs in which one of the impacts of technology is that low skill workers become a homogeneous group and college education becomes more complementary with low skill labor than it was 50 or 60 years ago.
Niccolo
May 26 2009 at 7:40pm
Having been a relatively recent graduate of high school, I agree with Card about substance. If you don’t go onto college, you really probably don’t possess much more skills than a high school drop out. How much more marginal benefit does that extra couple months of football games and dances really possess anyways?
As far as marketing, however, that high school diploma does give you a certain edge over others. I don’t know why employers care about that, any diploma is really just a job ticket, in my opinion, but they do.
Mximum Liberty
May 26 2009 at 7:44pm
A couple thoughts:
First, someone with an 8th-grade education is probably competent to perform the jobs that a high school graduate is competent to perform.
Second, the vast variation in quality of a high school education effectively degrades any signal being sent. Unless I happen to know something about your high school, your high school diploma really doesn’t say anything about wehther your are literate or numerate.
I’d be really interested to see if the perfect substitutability held if you looked at private and public high schools separately. It would help distinguish between my first and second thoughts above.
Max
Greg N
May 26 2009 at 7:55pm
I’m currently studying the returns to schooling for my labor prelim. This finding goes against just about all the estimates I’ve seen. Heckman, Lochner and Todd in their Handbook of Economics of Education article find that the internal rate of return between 10 years and 12 years of schooling was 25% in 1940 and increased to 50% in 1990 (white men). It was even higher for black men. The IV estimates are generally more in the range of 10% that you get from Mincer equations. How does that wage differential persist given that high school grads and non-grads are perfect substitutes?
Pete K
May 26 2009 at 9:06pm
From my days doing manpower and personnel research for the military we found huge differences between HS grads and the dropouts. The differences were not cognitive but in the ability to complete basic and skills training. If I recall correctly, dropouts failed to complete training and initial enlistments at about 15-20 percentage points higher rates than the graduates. Jim Heckman also found major differences using completely different samples and methods.
Andy
May 26 2009 at 9:10pm
This discussion would be greatly complemented by Heckman’s argument that GED-recipients should actually be categorized as high-school dropouts given they look basically identical in both skill and outcome measures. This is due to several reasons, one being that if you drop out of high school at all, you’re probably pretty bad on a lot of important characteristics. Standard high school graduates look very different from these dropout guys. Since the percentage of high school “graduates” who are actually GED recipients has been increasing over time, changes in the wage “gap” between high school graduates and other categories can be driven by this artificial compositional change. Heckman and Lafontaine have the details.
A look at Card’s paper suggests he doesn’t make this correction, which is unfortunate.
Richard A.
May 26 2009 at 11:00pm
David Card’s study on the minimum wage and his studies on immigration are contradictory. See Bryan Caplan from four years back–
http://www.econlib.org/archives/2005/05/infinite_contra.html
See also the Borjas blog–
http://borjas.typepad.com/the_borjas_blog/2007/07/the-minimum-wag.html
GabbyD
May 27 2009 at 3:26am
a question on perfect substitutes micro 101:
if two goods/factors are perfect substitutes, then if the relative wages are not equal to relative productivities, there will be a corner solution.
so if relative wages for not HS grad dips relative to HS grad, then the relative employment of HS grad to non-HS grad drops greatly
Niccolo
May 27 2009 at 5:14am
Pete K.
I think that may have much more to do with the type of people that tend to drop-out than what high school graduation accomplishes.
Pete K
May 27 2009 at 7:05am
Niccolo,
I agree. It is clearly more of a signalling process than an outcome of classroom learning. Bryan Caplan would be pleased.
I also recall that the results for GEDs were more similar to dropouts than graduates, much as Heckman found.
George
May 27 2009 at 3:29pm
1) My mother used to teach in a GED program. She loved the fact that her students (mostly in their 20s and 30s) were so motivated. It’s a shame if the GED turns out to be worthless for them.
2) If you’re just on the borderline between becoming a dropout and sticking it out for another year to get the diploma: don’t you have a huge incentive to stick it out? If you drop out, you’re in the very top of the dropout group, but will be treated as a median dropout. On the other hand, if you stick it out, you’ll be in the very bottom of the diplomate group, but will be treated as a median graduate. (I’m betting there’s an economic name for this, and that it has “marginal” in it somewhere.)
Why doesn’t this suck more people into graduating? Does it already, and so we really have a bunch of almost-dropouts getting degrees? Or are all 16-year-old males pretty much as unwise as I was at that age, and impervious to arguments about the future?
Comments are closed.