How much does education matter in determining what an individual's future earnings will look like? In 2002, the U.S. Census Bureau issued a report (available as a 104KB PDF document) that documented the average wage by age for surveyed individuals who had attained a defined level of education in the years from 1997 through 1999. The following chart, which was produced using data from Table 1 of the report, illustrates these results for all workers in 1999 U.S. dollars:

Click image for a larger version.

What makes the chart interesting is that it represents a snapshot of what an individual's annual earnings may look like, adjusted for inflation, over their lifetime. For instance, we can see annual earnings rising rapidly (for most groups) as the average individual gains job-specific skills in the years immediately after entering the workforce. Other patterns we see in the trajectories reflect the supply and demand for educated workers, the effect of benefits upon the lifetime earnings trajectories and even the impact that early retirement of higher income earners upon documented average wages by education level may have at older ages.

Supply and Demand for Educated Workers

The authors of the report note the variation in the earnings trajectories shown in the chart. As the age of the worker increases, we see peaks and dips in the salary curves that seem correlated, as there is a peak occurring in the average earnings for one level of educational attainment while a dip occurs in another curve. These variations reflect the relative supply and demand for various occupations over time that require certain levels of education. For instance, the Census Bureau notes in its 2000 report that:

In the 1970s, the premiums paid to college graduates dropped because of an increase in their numbers, which kept the relative earnings range among the educational attainment levels rather narrow. Recently, however, technological changes favoring more skilled (and educated) workers have tended to increase earnings among working adults with higher educational attainment, while, simultaneously, the decline of labor unions and a decline in the minimum wage in constant dollars have contributed to a relative drop in the wages of less educated workers.

The chart therefore shows that variation in the supply and demand for skilled workers over time in the relative peaks and valleys that occur in each education-level curve at a given worker age.

Other Interesting Patterns

Flattening Curves: For all but those with professional degrees (doctors, dentists, veterninarians, etc.), the average earnings curves also appear to flatten out over time, rather than increasing steadily as workers age. This effect may be due to a transition from primarily receiving earnings in the form of salaries and wages to receiving an increasing portion of earnings in the form of benefits (such as for health care) which are not recorded by the Census Bureua's surveys.

Old-Age Drop-off: We also notice a significant decrease in earnings for individuals in nearly every education level at the upper end of the age range. While the Census Bureau's 2000 report makes no comment on this phenomenon, I would hypothesize that this nearly across-the-board decrease represents the loss of higher income earners in the survey population to early retirement, rather than an indication that individuals have their earnings reduced at the end of their careers. Another factor that may play into the drop-off is older workers reducing their hours worked per year, which would also reduce their income.

Your Equivalent 1999 Salary

Aside from conducting a new survey with sufficient breadth and depth to capture average income profiles by age, there's really no good way to update the chart with today's salaries and wages. What I can do however, is convert your current annual income and wages into 1999's dollars - and here's the calculator to do the math:

The figure that appears for the Inflation Rate, 2.22%, represents the annualized rate of increase in the Consumer Price Index between 1999 and 2005 (as reverse engineered from data obtained using the Bureau of Labor Statistics' Inflation Calculator - this provides a direct conversion from the value of today's dollars to 1999's dollars. You might alternatively want to consider the rate of increase in average wages themselves, which increased at an annualized rate of 2.83% between 1999 and 2003 (more recent data is not available at the time of this post.)

Using the Calculator with the Chart

Aside from what I expect is the chart's most common use, that of scaring students from dropping out of school, probably the most useful application to which the chart may be put is to visualize the path one's earnings may take as they age. If you assume that your earnings will largely parallel the trajectories shown in the chart for your level of education, you might find that information useful for your financial planning. Have fun with it! And kids, stay in school....

Labels: earnings, education, tool

- posted by Ironman at 9:00 AM | Permalink | Home |