October 27, 2015 William R. Emmons Center for Household Financial Stability



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  • October 27, 2015
  • William R. Emmons
  • Center for Household Financial Stability
  • Federal Reserve Bank of St. Louis
  • William.R.Emmons@stls.frb.org
  • These comments do not necessarily represent the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
  • Education and Wealth:
  • No Silver Bullet
  • Society for Financial Education and Professional Development

www.stlouisfed.org/household-financial-stability/the-demographics-of-wealtht

  • www.stlouisfed.org/household-financial-stability/the-demographics-of-wealtht
  • Part 1: Race, Ethnicity and Wealth (Feb. 2015).

www.stlouisfed.org/household-financial-stability/the-demographics-of-wealtht

  • www.stlouisfed.org/household-financial-stability/the-demographics-of-wealtht
  • Part 1: Race, Ethnicity and Wealth (Feb. 2015).
  • Part 2: Education and Wealth (May 2015).
  • The Demographics of Wealth: An Essay Series

www.stlouisfed.org/household-financial-stability/the-demographics-of-wealtht

  • www.stlouisfed.org/household-financial-stability/the-demographics-of-wealtht
  • Part 1: Race, Ethnicity and Wealth (Feb. 2015).
  • Part 2: Education and Wealth (May 2015).
  • Part 3: Age, Birth Year and Wealth (July 2015).
  • The Demographics of Wealth: An Essay Series
  • Overview of Education and Wealth: No Silver Bullet
  • Educational attainment and wealth are highly correlated.
  • But some of the education-wealth correlation is spurious—that is, not causal but due instead to other factors that affect both education and wealth.
  • In addition to wealth, education also is correlated with:
  • A college degree itself does not magically confer all of the benefits that college grads typically enjoy—financial success requires more than a sheepskin.
  • Educational Attainment Predicts Median Family Income
  • Percent
  • Note: these figures include all families. Some of our recent work covers only families headed by someone 40 or older.
  • 2013 dollars
  • Source: Federal Reserve Board, Survey of Consumer Finances
  • Note: these figures include all families. Some of our recent work covers only families headed by someone 40 or older.
  • Educational Attainment Predicts Median Family Wealth
  • Source: Federal Reserve Board, Survey of Consumer Finances
  • Index levels equal 100 in 1989
  • Note: these figures include all families. Some of our recent work covers only families headed by someone 40 or older.
  • Source: Federal Reserve Board, Survey of Consumer Finances
  • Percent
  • Note: these figures include all families. Some of our recent work covers only families headed by someone 40 or older.
  • Generally Speaking, Only College Grads Have Gained Wealth Over Time
  • Source: Federal Reserve Board, Survey of Consumer Finances
  • Percent
  • Education Predicts Asset Diversification, Which Is Associated With Greater Wealth
  • Source: Federal Reserve Board, Survey of Consumer Finances
  • Percent
  • In 1989, College Grads Represented
  • 28% of Families But Owned 55% of Wealth
  • Source: Federal Reserve Board, Survey of Consumer Finances
  • All college graduates: 28%
  • No college: 72%
  • No college: 45%
  • Note: these figures include all families. Some of our recent work covers only families headed by someone 40 or older.
  • All college graduates: 55%
  • Source: Federal Reserve Board, Survey of Consumer Finances
  • In 2013, College Grads Represented
  • 39% of Families But Owned 75% of Wealth
  • All college graduates: 39%
  • All college graduates: 75%
  • No college: 61%
  • No college: 25%
  • Note: these figures include all families. Some of our recent work covers only families headed by someone 40 or older.
  • How Are Education and Wealth Related? Common Fallacies
  • “If you get a college degree you will be rich; with a post-graduate degree you’ll be even richer.”
    • Not necessarily—We observe a correlation but cannot determine causation.
  • “If we could send everyone to college we would eliminate wealth disparities.”
      • Probably not—Not everyone can (or wants to) complete college.
      • Wealth disparities are very large among college grads, too.
  • Education and wealth are related but exactly how is very complicated!
  • Source: Federal Reserve Board, Survey of Consumer Finances
  • Percent
  • An Illustration of Spurious Correlation: Education and Inheritance
  • Does more education cause more inheritances?
  • Do inheritances cause more education?
  • No to both—or not by themselves.
  • Rather, people who are more educated tend to have parents who also are more educated and wealthier.
  • Education is one input—among many—into wealth accumulation.
  • There are many determinants of educational attainment, too.
  • Inheritances: Better-educated people are much more likely to receive sizable gifts or inheritances simply because they are more likely to have better-educated, higher-earning parents who have accumulated wealth.
  • Bottom line: Educated parents produce both educated offspring and wealth that can be passed down.
  • Natural abilities: People with higher natural cognitive and non-cognitive abilities are more likely to complete higher levels of education.
  • At the same time, measures of cognitive and non-cognitive ability also predict success in achieving higher social status, avoiding poverty and criminality, enjoying better health and achieving greater longevity.
  • Bottom line: More-talented people get more education and do many other things that can lead to greater wealth.
  • Six Sources of the Partially Spurious Correlation Between Education and Wealth
  • Family background: The parents’ socio-economic status (social class, occupation, education, income, wealth) contributes to the child’s success as an adult in many different ways.
  • Bottom line: High-status children get more education and enjoy other economic and financial benefits.
  • Six Sources of the Partially Spurious Correlation Between Education and Wealth
  • Assortative mating (“like marries like”): The link between education and earnings and the tendency for highly educated people to marry each other effectively doubles the college wage premium for these families. Financial decision-making also may be improved with two educated spouses.
  • Bottom line: Your education creates wealth and attracts an educated spouse.
  • Six Sources of the Partially Spurious Correlation Between Education and Wealth
  • Incentive to become financially knowledgeable: High-earning families have a strong incentive to learn how to shift middle-age income into retirement.
  • Bottom line: High income during working years creates wealth and spurs financial learning.
  • Six Sources of the Partially Spurious Correlation Between Education and Wealth
  • Better health and longer lifespans: People who get more education are healthier, on average.
  • Better health extends working lives and lengthens healthy retirement years.
  • Longer-lived people collect more from Social Security and private pensions and their investments have more time to grow.
  • Bottom line: People who get more education tend to be healthier and wealthier.
  • Six Sources of the Partially Spurious Correlation Between Education and Wealth
  • Correlation vs. Causation:
  • Three Theories
  • Education
  • Income
  • Wealth
  • Theory 1
  • Correlation vs. Causation:
  • Three Theories
  • Education
  • Income
  • Wealth
  • Education
  • Income
  • Wealth
  • Financial decision-making
  • Theory 1
  • Theory 2
  • Correlation vs. Causation:
  • Three Theories
  • Education
  • Income
  • Wealth
  • Education
  • Income
  • Wealth
  • Financial decision-making
  • Cognitive ability
  • Non-cognitive traits (“grit”)
  • Socio-economic status
  • Education itself
  • Education by-products
    • Educated spouse
    • Incentive to become financially savvy
  • Income
  • Wealth
  • Financial decision-making
  • Theory 1
  • Theory 2
  • Theory 3
  • In Sum: Education and Wealth Are Correlated But Causal Link May Be Weak
  • Some—perhaps much—of the education-wealth correlation is spurious.
    • That is, education alone does not cause wealth accumulation; a college degree is not magic.
    • Rather, many factors (ability, socio-economic status, grit) affect both educational attainment and wealth.
  • Therefore, educational attainment alone may be a weak policy instrument for widening and equalizing the distribution wealth.
  • For More Information
  • Center for Household Financial Stability
  • www.stlouisfed.org/household-financial-stability
  • Education and Wealth essay
  • www.stlouisfed.org/household-financial-stability/the-demographics-of-wealth/essay-2-the-role-of-education
  • In the Balance articles
  • www.stlouisfed.org/publications/in-the-balance
  •  


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