Why Poorer Students Earn Less (Even With the Same Degree)
I recently saw this video where Anna Stansbury, an assistant professor at MIT, explains that people who grew up in poverty end up earning less than their more affluent peers, even when they attended the same university:
This chart shows how a child's income rank (at age 32-34) compares to their parent's income rank across the income spectrum.
For example, if a parent was at the 20th percentile of income, we would expect their child to have a 42nd percentile income whether their child attended college or not. This is represented by the National (grey) line.
However, if we knew that their child attended a two-year school, we would expect them to have a 48th percentile income (yellow line). If they attended a non-elite four-year college, we would expect them to have a 60th percentile income (green line). And if they attended an elite college, we would expect them to have a 73rd percentile income (blue line).
Overall, future earnings tend to increase when children attend more selective educational institutions. This is why each line has a higher intercept (on the y-axis) than the one below it. This effect is so pronounced that the poorest students at more selective colleges tend to have higher expected earnings than the wealthiest students at less selective ones!
This suggests that getting into a good school probably matters more for your future earnings than the family you grew up in. That's the encouraging part. However, the slope of each line is not zero, meaning that parental income is still correlated with child earnings even among students at the same institution type.
On a national scale, the slope is 0.288 meaning that the children of the wealthiest families end up having incomes about 29 percentiles higher than the children of the poorest families (regardless of where they go to university).
Once you focus on the children who attended non-elite four-year colleges, the slope decreases to 0.095. This means that the children of wealthiest families at these schools end up having incomes about 10 percentile points higher than the children of the poorest families. This suggests an equalizing effect of college attendance on earning outcomes.
Finally, for children attending elite colleges, students from the wealthiest families only end up having incomes about 6.5 percentiles higher than the students from the poorest families. This is the smallest slope measured, suggesting that elite colleges come closest to equalizing earnings outcomes across family backgrounds. While this slope is smallest among elite colleges (only about 7 percentile points), it isn't nothing.
To put this in perspective, a 30-34 year old household at the 70th percentile of income earned about $110,000 a year in 2022, while a 30-34 year old household at the 77th percentile of income earned about $120,000 a year. Those 7 percentile points translate into about $10,000 per year in additional income. That $10,000 a year might seem small, but over the course of a multi-decade career, it's hundreds of thousands of dollars in extra earnings.
Though the NBER research uses individual income instead of household income, the point remains—small earnings gaps compound over time to create much larger wealth gaps in the future.
While this is intriguing in its own right, how does this gap happen in the first place? The data tells us that the gap exists, but it can't tell us why. For that, we need to look beyond the numbers.
We know that socio-economic background matters for how well someone does in school, whether they get the chance to go to university, what kind of university they go to, what kind of degree and grade they get. I think there's often an assumption that these effects of socio-economic background are kind of washed out from then onwards... But to document that two people who were literally getting exactly the same degree at the same university in the same subject at the same time with the same grade, still end up having a 7% earnings gap 10 years after graduation is the kind of big new striking finding I want to pull out.A study from researchers at the NBER, covering over 30 million students, illustrated this pattern at scale by examining the differences between parent and child incomes based on university attendance. Though children who attended college saw a smaller earnings gap between those from poor and wealthy families, a gap exists nonetheless. Before we can address why poorer kids lag behind their wealthier peers, let's see how much they lag behind in the first place.
How Big is the Earnings Gap?
We can see the size of the earnings gap (based on parental income) in the plot below which shows child income rank vs. parental income rank nationally (in grey), for children who attended two-year schools (yellow), elite colleges (in blue), and other four-year colleges (in green):
This chart shows how a child's income rank (at age 32-34) compares to their parent's income rank across the income spectrum.
For example, if a parent was at the 20th percentile of income, we would expect their child to have a 42nd percentile income whether their child attended college or not. This is represented by the National (grey) line.
However, if we knew that their child attended a two-year school, we would expect them to have a 48th percentile income (yellow line). If they attended a non-elite four-year college, we would expect them to have a 60th percentile income (green line). And if they attended an elite college, we would expect them to have a 73rd percentile income (blue line).
Overall, future earnings tend to increase when children attend more selective educational institutions. This is why each line has a higher intercept (on the y-axis) than the one below it. This effect is so pronounced that the poorest students at more selective colleges tend to have higher expected earnings than the wealthiest students at less selective ones!
This suggests that getting into a good school probably matters more for your future earnings than the family you grew up in. That's the encouraging part. However, the slope of each line is not zero, meaning that parental income is still correlated with child earnings even among students at the same institution type.
On a national scale, the slope is 0.288 meaning that the children of the wealthiest families end up having incomes about 29 percentiles higher than the children of the poorest families (regardless of where they go to university).
Once you focus on the children who attended non-elite four-year colleges, the slope decreases to 0.095. This means that the children of wealthiest families at these schools end up having incomes about 10 percentile points higher than the children of the poorest families. This suggests an equalizing effect of college attendance on earning outcomes.
Finally, for children attending elite colleges, students from the wealthiest families only end up having incomes about 6.5 percentiles higher than the students from the poorest families. This is the smallest slope measured, suggesting that elite colleges come closest to equalizing earnings outcomes across family backgrounds. While this slope is smallest among elite colleges (only about 7 percentile points), it isn't nothing.
To put this in perspective, a 30-34 year old household at the 70th percentile of income earned about $110,000 a year in 2022, while a 30-34 year old household at the 77th percentile of income earned about $120,000 a year. Those 7 percentile points translate into about $10,000 per year in additional income. That $10,000 a year might seem small, but over the course of a multi-decade career, it's hundreds of thousands of dollars in extra earnings.
Though the NBER research uses individual income instead of household income, the point remains—small earnings gaps compound over time to create much larger wealth gaps in the future.
While this is intriguing in its own right, how does this gap happen in the first place? The data tells us that the gap exists, but it can't tell us why. For that, we need to look beyond the numbers.
What Creates the Gap?
I know from personal experience that one of the reasons that less well-off students earn less than their more affluent peers is because they aren't as informed about how the corporate world works. For example, I didn't know that I had to apply for an internship in the winter of my sophomore year to get a sophomore summer internship to leverage into a junior summer internship to get a full-time offer senior year. That knowledge was graciously gifted to me by a college friend of mine who grew up in a wealthy Seattle suburb. If he hadn't told me about how these recruiting pipelines function, I wouldn't have gotten a sophomore summer internship. This would've put me far behind my peers when recruiting for junior summer internships the next year, and would've made full-time recruiting during my senior year (two years later) more difficult as well. Think about it. A single decision when I'm 19 years old ends up impacting my entire career trajectory. And many kids, especially poorer ones, are completely oblivious to how this all works. So they miss out and go into full-time recruiting senior year at a massive disadvantage to their peers who knew better. My experience isn't unusual either. The research suggests that this kind of informational and social advantage operates through three main channels: networks, internships, and hiring discrimination.Networks
The reason my friend was so knowledgeable about college recruiting was because of his network. His father was a long-time software engineer at Microsoft. His friends came from well-to-do families in the Seattle area. His older frat brothers had already gone through this process before. This kind of knowledge gets passed through social networks, which are heavily segregated by income/wealth.
For example, Raj Chetty and co-authors analyzed 21 billion Facebook friendships and found that a person's "economic connectedness" (the share of their friends who come from higher-income backgrounds) is the single strongest predictor of upward mobility in the research literature. This effect is so strong that children from low-income families with the same economic connectedness as their wealthier peers increased their earnings as an adult by about 20% on average.
This matches research I discussed recently, which found that elite networks are most valuable to those outside of them (e.g. children from low-income families).
But networks aren't useful if you don't have the resources to take advantage of them.Internships
Internships are a great way for students to gain real-world experience, but with many of them being unpaid, this limits who can actually take them. For example, one study found that 64% of students who did not take internships, but wanted to, cited the need to have paid work as one of the primary barriers.Unfortunately, wealthier students can afford to take the unpaid (or low-paid) internships that open doors to high-paying careers that their less affluent peers can't. This is a structural advantage that has nothing to do with talent or effort.
But even if someone can afford to take an unpaid internship, there's evidence that they are less likely to get it if they don't fit in.Hiring Discrimination/Social Cues
Even when lower-income students manage to get the same degree from the same school and apply for the same jobs, they can face discrimination in the hiring process.
A 2016 study sent fake resumes to 316 law firms. The resumes were identical in qualifications, but had different extracurricular activities and interests to signal different class backgrounds. Male resumes with traditionally upper-class extracurriculars received callbacks at a rate of 16.25%, more than four times the callback rate of male applicants with lower-class extracurriculars.
Unfortunately, if your future coworkers don't think you'll fit in for one reason or another, they are less likely to hire you. I don't think this kind of discrimination is deliberate, but it happens nonetheless. This isn't just true at law firms, but has also been shown in academia as well. Anna Stansbury co-authored a paper titled The Class Gap in Career Progression: Evidence from US academia, which came to a similar conclusion (emphasis mine):First-generation college graduates are 10% less likely to be tenured at an R1, are tenured at institutions ranked 11% lower, earn 3% less, and report 5% lower job satisfaction, than their former PhD classmates (from the same institution and field) with a parent with a non-PhD graduate degree. Neither selection out of academia nor different preferences explain this gap; differential research productivity also plays little role. Instead, likely drivers are differences in cultural and social capital.Knowing the right people and having the right background seems to matter more for career success than people traditionally imagine. But there are small ways in which you can help to close the gap.