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RETURN ON INVESTMENT: Federal Reserve Chairman Says that a Greater Investment in Education Could Reduce Income Inequality Among Americans

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“As the larger return to education and skill is likely the single greatest source of the long-term increase in inequality, policies that boost our national investment in education and training can help reduce inequality while expanding economic opportunity,” Bernanke said

Echoing some of the warnings about a need for greater focus on education to strengthen the nation’s economic outlook given to the same group by his predecessor, Alan Greenspan, in 2004, Federal Reserve Chairman Ben S. Bernanke said in a February 6 speech before the Greater Omaha (Nebraska) Chamber of Commerce that an increased national investment in education and training could help reduce the growing income inequality in America.

“As the larger return to education and skill is likely the single greatest source of the long-term increase in inequality, policies that boost our national investment in education and training can help reduce inequality while expanding economic opportunity,” Bernanke said. “A substantial body of research demonstrates that investments in education and training pay high rates of return both to individuals and to the society at large. That research also suggests that workers with more education are better positioned to adapt to changing demands in the workplace.”

In his speech, Bernanke discussed how the difference between high- and low-income workers has expanded significantly over the last twenty-five years. For example, he explained that the median wage (individuals at the 50th percentile) rose about 11.5 percent between 1979 and 2006, while wages for individuals at the 90th percentile rose 34 percent. At the other end of the earnings spectrum, individuals earning the lowest wages (10th percentile) saw their wages increase by only 4 percent.

In discussing how such inequality could occur, Bernanke said that the real wages of workers with more formal education have increased more quickly that those of workers with less education. As evidence, he pointed out that median weekly earnings for workers with a bachelor’s degree (or higher) in 1979 was 38 percent more than those with a high school degree. Last year, the difference was 75 percent—nearly double the amount in 1979. During that same time period, the gap in median earnings between high school graduates and high school dropouts increased from 19 percent to 42 percent.

To reduce the trend toward increasing economic inequality, Bernanke pushed for policymakers to take actions that would “focus on education, job training, and skills that facilitate job search and job mobility. . . . By increasing opportunity and capability, we help individuals and families while strengthening the nation’s economy as well,” he said.

Chairman Bernanke’s complete speech is available at http://www.federalreserve.gov/boarddocs/speeches/2007/20070206/default.htm.

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