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Trade school, not 4-year college, can solve the US income gap

It has long been assumed that a college degree leads to higher average income, what some might call the college premium. But even with this hypothetical edge, some students will earn less than average. And they might even lose money if the burden of college debt undermines the income boost that comes with a bachelor’s degree.

“There are serious questions about the future trends of the college premium,” Aizenman told CNBC in an email. “Providing cheaper and better vocational education and re-training will provide the marginal workers with useful options.”

After studying data from the World Wealth and Income Database, OECD and Eurostat, the researchers concluded: “As manufacturing sector becomes more important in a country’s income, relatively unskilled laborers benefit from access to vocational education, thereby narrowing the income gap with skilled labor.”

To answer how that conclusion can be applied in the U.S. given manufacturing’s decline as a percentage of the labor force and share of GDP, the researchers did a case study of manufacturing industries in the U.S. and Germany.

Source: OECD, Aizenman et al.

Manufacturing employment has fallen in both countries, yet in Germany, manufacturing’s value added has stayed around 22 percent in the last 20 years.

Of note: The share of workers with upper secondary education in Germany exceeds that of the U.S. by about 15 percent. However, the share of workers with post-high school education in the United States exceeds that of Germany by about 17 percent.

Germany’s education system, the researchers said, better fits the needs of modern manufacturing, which requires more upper-secondary and vocationally trained labor.

In the U.S., on the other hand, “there are too many four-year colleges serving too many students, and too few institutions with greater focus on vocational education and training,” Aizenman said.

“Chances are that better vocational education access and its quality in the U.S. would increase the income of the workers that are in manufacturing, and probably would reduce the overall income inequality in the US,” he added.

Note: Working papers have not been peer-reviewed or been subject to review by the NBER Board of Directors that accompanies official NBER publications.

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