St. Louis Fed study shows education level alone does not explain growing wealth gap
A new study from the Federal Reserve Bank of St. Louis finds families with higher levels of education attain more wealth, and that the wealth gap between educational attainment levels is growing.
But the authors also stress that education alone does not explain the differences in these outcomes.
In its "Education and Wealth" essay that's part of its Demographics of Wealth series, the study authors report a "very strong," growing and widening association between a family's educational attainment and its income, wealth and financial health levels. Yet they said more is at play than just what degrees a family obtains.
"Education is absolutely a clear marker: more education is associated with better outcomes, but the thing that is equally important is what does that really mean?" said Bill Emmons, senior economic advisor at the Fed's Center for Household Financial Stability. "Does education per se cause these good outcomes, and our framing is 'No, that’s not the way to think about it.' Correlation is not causation."
For example, the study found an interesting disparity when looking at gaps by education level for income compared with wealth.
In general, the study shows that those with more education tend to make more money. Over the course of about 25 years, those median inflation-adjusted incomes for families at different education levels stayed relatively the same - and the gap between the most educated families and those with less education grew only slightly, Emmons said.
But the situation was drastically different when looking at wealth by education level: wealth has gone up over time, but it's not spread out evenly among education levels.
"If you look at wealth, it is quite dramatic," Emmons said. "The differences were large to begin with a quarter century ago, but these gaps have expanded quite a bit. So the median wealth of the most highly educated families have gone up substantially, on the order of 40 some percent, over this period…and the least educated group has gone down by something like 40 percent."
In other words, the researcher found that the wealth gap is not only bigger than the income gap for families by education level, but it is also growing apart more quickly.
"If education were the only thing or what the degree gives you were the only thing going on, you wouldn't expect to see such different patterns in the income versus the wealth. So that suggests there must be something else going on than strictly the income," Emmons said.
The study suggests a degree alone will not necessarily produce these better financial outcomes. Other contributing factors that may be associated with having more education, but are not based on degree attainment itself include: native ability, family background (such as having highly educated and wealthy parents), marrying people of like levels of education, incentives to becoming financially knowledgeable, receiving inheritances, and having better health.
Additionally, good financial decision-making, such as debt management and diverse investments, is also shown to be linked to education level - which only increases a family's accumulation of wealth.
"It’s suggestive that those differences are pretty stark across education levels. Those are probably mediating or influencing how (people's incomes) gets translated into their wealth," Emmons said.
While the study also finds that on average, the U.S. is becoming more educated, not everyone is equally accessing better degrees. The study notes that Asians of both genders and women of all races have made a lot of progress, while black and Hispanic men have struggled to advance. Still, the study finds in general educational attainment rates rank in following order: Asian, white, black and Hispanic.
"Given that there’s very clear linkages between race and ethnicity and the propensity to receive any particular level of education, since we know that there is also a link between education and all kinds of outcomes in the labor market, it of course is also the case that race is correlated with (income, wealth, financial decision-making)," he said.
If no policy changes are made, Emmons said the study suggests that the link between education and income, wealth and financial health will get stronger in the future - and that the gaps between educational levels will grow.