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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


June 30, 2014


The Implications of Flat or Declining Real Wages for Inequality

A recent Policy Note published by the Levy Economics Institute of Bard College shows that what we thought had been a decade of essentially flat real wages (since 2002) has actually been a decade of declining real wages. Replicating the second figure in that Policy Note, Chart 1 shows that holding experience (i.e., age) and education fixed at their levels in 1994, real wages per hour are at levels not seen since 1997. In other words, growth in experience and education within the workforce during the past decade has propped up wages.

Chart 1: Actual and Fixed Real Wages, 1994-2013

The implication for inequality of this growth in education and experience was only touched on in the Policy Note that Levy published. In this post, we investigate more fully what contribution growth in educational attainment has made to the growth in wage inequality since 1994.

The Gini coefficient is a common statistic used to measure the degree of inequality in income or wages within a population. The Gini ranges between 0 and 100, with a value of zero reflecting perfect equality and a value of 100 reflecting perfect inequality. The Gini is preferred to other, simpler indices, like the 90/10 ratio, which is simply the income in the 90th percentile divided by the income in the 10th percentile, because the Gini captures information along the entire distribution rather than merely information in the tails.

Chart 2 plots the Gini coefficient calculated for the actual real hourly wage distribution in the United States in each year between 1994 and 2013 and for the counterfactual wage distribution, holding education and/or age fixed at their 1994 levels in order to assess how much changes in age and education over the same period account for growth in wage inequality. In 2013, the Gini coefficient for the actual real wage distribution is roughly 33, meaning that if two people were drawn at random from the wage distribution, the expected difference in their wages is equal to 66 percent of the average wage in the distribution. (You can read more about interpreting the Gini coefficient.) A higher Gini implies that, first, the expected wage gap between two people has increased, holding the average wage of the distribution constant; or, second, the average wage of the distribution has decreased, holding the expected wage gap constant; or, third, some combination of these two events.

Chart 2: Wage Distribution Gini Coefficients over Time

The first message from Chart 2 is that—as has been documented numerous other places (here and here, for example)—inequality has been growing in the United States, which can be seen by the rising value of the Gini coefficient over time. The Gini coefficient’s 1.27-point rise means that between 1994 and 2013 the expected gap in wages between two randomly drawn workers has gotten two and a half (2 times 1.27, or 2.54) percentage points larger relative to the average wage in the distribution. Since the average real wage is higher in 2013 than in 1994, the implication is that the expected wage gap between two randomly drawn workers grew faster than the overall average wage grew. In other words, the tide rose, but not the same for all workers.

The second message from Chart 2 is that the aging of the workforce has contributed hardly anything to the growth in inequality over time: the Gini coefficient since 2009 for the wage distribution that holds age constant is essentially identical to the Gini coefficient for the actual wage distribution. However, the growth in education is another story.

In the absence of the growth in education during the same period, inequality would not have grown as much. The Gini coefficient for the actual real wage distribution in 2013 is 1.27 points higher than it was in 1994, whereas it's only 0.49 points higher for the wage distribution, holding education fixed. The implication is that growth in education has accounted for about 61 percent of the growth in inequality (as measured by the Gini coefficient) during this period.

Chart 3 shows the growth in education producing this result. The chart makes apparent the declines in the share of the workforce with less than a high school degree and the share with a high school degree, as is the increase in the shares of the workforce with college and graduate degrees.

Chart 3: Distribution of the Workforce across Educational Status

There is little debate about whether income inequality has been rising in the United States for some time, and more dramatically recently. The degree to which education has exacerbated inequality or has the potential to reduce inequality, however, offers a more robust debate. We intend this post to add to the evidence that growing educational attainment has contributed to rising inequality. This assertion is not meant to imply that education has been the only source of the rise in inequality or that educational attainment is undesirable. The message is that growth in educational attainment is clearly associated with growing inequality, and understanding that association will be central to the understanding the overall growth in inequality in the United States.

Photo of Jessica DillBy Julie L. Hotchkiss, a research economist and senior policy adviser at the Atlanta Fed, and

Fernando Rios-Avila, a research scholar at the Levy Economics Institute of Bard College


June 30, 2014 in Education, Employment, Inequality, Labor Markets | Permalink

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Thanks for an interesting post. I have been tracking wage inequality in Washington state over the past 20 years, but haven't had access (yet) to age and education dimensions, and these are important considerations.

I think you muddy the waters a bit by sometimes talking about inequality without qualifying it as wage inequality. I believe that increasing inequality in non-wage income and wealth are much bigger issues than wage inequality.

Posted by: Scott Bailey | June 30, 2014 at 10:42 PM

One characteristic that is not discussed or difficult to discuss is the co-relation of nature of job to the educational status. The distribution of workforce across educational status does not really say whether they can do what they are doing, only if they are 'educated' so and so!

Posted by: Raghuraman R | July 01, 2014 at 12:30 AM

Wealthy parents can afford to send children to college explains more this dynamic than the "high return on education"...especially at the median not the mean.

Posted by: gman | July 01, 2014 at 02:06 PM

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January 17, 2014


What Accounts for the Decrease in the Labor Force Participation Rate?

Editor's note: Since this post was written, we have developed new tools for examining labor market trends. For a more detailed examination of factors affecting labor force participation rates, please visit our Labor Force Participation Dynamics web page, where you can create your own charts and download data.

Despite the addition of only 74,000 jobs to the economy in December, the unemployment rate dropped significantly—from 7 percent to 6.7 percent. The decline came mostly from a decrease in the labor force.

Since the recession began, the labor force participation rate (LFPR) has dropped from 66 percent to 63 percent. Many people have left the labor force because they are discouraged from applying (U.S. Bureau of Labor Statistics data indicate that a little under 1 million people fall into this category). But the primary drivers appear to be an increase in the number of people who are either retired, disabled/ill, or in school.

Certainly, the aging of the population accounts for much of the increase in the retired and disabled/ill categories. Still, there has been a lot of movement over the past few years in the reasons people cite for not participating in the labor force within age groups. Knowing the reasons why people have left (or delayed entering) the labor force can help us understand how much of the decline will likely halt once the economy picks back up and how much is permanent. (For more on this topic, see here, here, and here.)

The chart below shows the distribution of reasons in the fourth quarter of 2013. (Of the people not in the labor force, 1.6 percent indicate they want a job and give a reason for not being in the labor force. They are categorized here as "want a job" only.) Young people are not in the labor force mostly because they are in school. Individuals 25 to 50 years old who are not in the labor force are mostly taking care of their family or house. After age 50, disability or illness becomes the primary reason people do not want to work—until around age 60, when retirement begins to dominate.


How has this distribution changed over the past seven years? For simplicity, I've grouped people by age to show changes over time in the reasons people give for not being in the labor force. However, you can also see an interactive version of the same data without age buckets—and download the data—here.

Of the 12.6 million increase in individuals not in the labor force, about 2.3 million come from people ages 16 to 24, and of that subset, about 1.9 million can be attributed to an increase in school attendance (see the chart below). In particular, young people aged 19 to 24 are more likely to be in school now than before the recession. Among college-age people, those absent from the labor force because they are in school rose from 57 percent to 60 percent. Among people of high school age, the share not in the labor force because they are in school rose from 87 percent to 88 percent.


The number of middle-aged workers not in the labor force rose by 1.8 million (or 11 percent), with four main factors driving the increase.* "Wants a Job" increased 546,000 (34 percent). The "In School" category increased 438,000 (a 38 percent rise). "Disability/Illness" rose 393,000 (an 8 percent rise), and 302,000 more people said they were retired (a 43 percent rise; see the chart below).


Among individuals aged 51 to 60, those not in the labor force increased by 1.6 million (or 16 percent). This increase came almost entirely from the number of people who are disabled or ill, which rose by 1.3 million (a 33 percent increase). Interestingly, the number of retired individuals actually fell by 305,000 between the fourth quarter of 2007 and the fourth quarter of 2010. Since then, the number of retired people within this age group has risen 183,000 but remains 122,000 lower than fourth-quarter 2007 levels. So it seems more people in this age group were delaying retirement instead of leaving early (see the chart below).


About 6.8 million of the 12.6 million increase in those not in the labor force came from the 61-and-over category. An additional 5.3 million (a 17 percent increase) are retired, and 1 million more (a 34 percent increase) are not in the labor force because they are disabled or ill. The other categories were little changed (see the chart below).


In total, the number of people not in the labor force rose by 12.6 million (16 percent) from the fourth quarter of 2007 to the fourth quarter of 2013. About 5.5 million more people (a 16 percent increase) are retired, 2.9 million (a 23 percent increase) are disabled or ill, and 2.5 million (a 19 percent increase) are in school. An additional 161,000 are taking care of their family or house, and an additional 99,000 are not in the labor force for other reasons. The fraction who say they want a job has risen the most (32 percent) but has contributed only 11 percent to the total change. The chart below shows the overall contributions by reason to the changes in labor force participation for all age groups since the onset of the recession.


What further changes can we anticipate? It's hard to say, as many moving parts are at play. Most people currently in school will be approaching the labor market upon graduation. But increased college and graduate school enrollment could augur a permanent shift in the portion of the population who are in school instead of the labor force. We can also expect continued downward pressure on the LFPR from retiring baby boomers as well as boomers who exit the labor force because of disability or illness.

Last, the portion of people who want a job has increased the most since the recession began, and is currently 1.4 million above its prerecession level. People in this category tend to have greater labor force attachment, making them more likely to shift into the labor force. In fact, the number of people in this category has already started to decrease—and is down 709,000 from the fourth quarter 2012.

My Atlanta Fed colleagues Julie Hotchkiss and Fernando Rios-Avila in their 2013 paper "Identifying Factors behind the Decline in the U.S. Labor Force Participation Rate," looked at a range of LFPR projections for 2015–17 based on different labor market assumptions. Depending on the future strength of the U.S. labor market, the projections are highly varying—ranging between a decline of 2.4 percentage points and an increase of 2 percentage points from the 2010–12 average of 64.1 percent. So far, more factors are pulling down the LFPR than pushing it up; the latest reading for December 2013 is already 1.3 percentage points below the 2010–12 average. At that pace, the Hotchkiss et al. lower-bound estimate will be reached before the end of 2014, unless the dynamics change as the economy further improves.

Photo of Ellyn TerryBy Ellyn Terry, an economic policy analysis specialist in the research department of the Atlanta Fed



* I've chosen to break the "middle-age" grouping at age 50 instead of 54 because the probability of retiring has changed in different ways over the past few years for the 25- to 50-year-old group and the 51- to 60-year-old group. See the chart mentioned earlier for more detail.

 

January 17, 2014 in Education, Employment, Labor Markets, Unemployment | Permalink

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Hmmm...a quick scan of this post seems hard to reconcile with the significant falloff in the 25 to 54 employment-to-population ratio from 1999 to 2013.

The E2P % fall seems to indicate more involuntary than voluntary exits within the 25-to-54 age group than this post seems to suggest.

("Taking care of the house" - Really? How was the house taken care of in the 90's?)

Wasn't the E2P collapse in 25 to 54 precisely why the Fed has been hitting the big red ZIRP button for over a decade?

Trying to hike cratered US 25-to-54 employment in the face of Chinese import competition in the US and capital export controls in China?

This certainly seems to have been behind the Fed's long-standing ZIRP...it would be very helpful if the Fed were upfront (finally) about it.

Instead the Fed seems to have been waging some sort of silent currency Cold War that has only been marginally effective on the US labor front and highly disruptive on the real and financial US investment front.

Posted by: cas127 | January 18, 2014 at 02:07 AM

Is the Fed subject to the First Amendment and not permitted to engage in content discrimination of blog posts?

I'll be asking a judge.

Posted by: cas127 | January 21, 2014 at 02:51 AM

Very informative. Thanks. I guess the rise in disability rolls tells us that there is some wiggle room within the answer categories (unless maybe people worked harder owing to less job security and hurt themselves more). And the 1% increase in staying in high-school maybe calibrates how much job opportunity there is for 17-year-olds to leave secondary education for work?

One data question: are any of the shifts in age composition of the US big enough to change some of these numbers? Eg if the number of 22-24-year-olds is changing over time then does that mess with the "staying in school longer" numbers?

Posted by: isomorphismes | January 21, 2014 at 05:05 AM

I found this article very interesting too. Clearly, this is the most critical missing link in the "recovery" so far. The fact that we are back to 1977 levels on the labour force participation rate is just depressing.

One of the most interesting things to come out of the data I think is that the notion of increasing labour supply in old age (inciting people to work longer) to reduce the "burden" of old age, rising dependency ratios etc seems to run into some obvious empirical obstacles. Exit from the labour force for retirement reasons starts to climb already from the age of 50 and onwards!

I have given this some airtime over at our own blog, it deserves it

http://blog.variantperception.com/2014/01/22/a-closer-look-at-the-decline-in-the-us-labour-force-participation-rate/

Claus

Posted by: Claus Vistesen | January 23, 2014 at 05:37 AM

Is there a reason you didn't also comment on the number of people in each age cohort? This is an important fact...what PERCENTAGE of people in each cohort who have retired/gone to school, etc. Can give a good sense of where we are going.

In other words, just because there are more nominal people who are 61+ and retired, doesn't mean there is a greater propensity for people over 61 to retire, it may mean there are a lot more people over the age of 61.

Studying the RATES for each cohort will tease out whether what is being seen is due to economic conditions, or simply due to changes related to people aging.

Posted by: AJ | January 27, 2014 at 08:12 PM

Labor force participation rate for men is at lowest level since data has been collected (started in 1948), and continues to trend downward with no sign of a plateau. Please explain.

Posted by: Richard Miller | May 16, 2014 at 01:14 PM

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December 23, 2013


Goodwill to Man

By pure coincidence, two interviews with Pennsylvania State University professor Neil Wallace have been published in recent weeks. One is in the December issue of the Federal Reserve Bank of Minneapolis’ excellent Region magazine. The other, conducted by Chicago Fed economist Ed Nosal and yours truly, is slated for the journal Macroeconomic Dynamics and is now available as a Federal Reserve Bank of Chicago working paper.

If you have any interest at all in the history of monetary theory over the past 40 years or so, I highly recommend to you these conversations. As Ed and I note of Professor Wallace in our introductory comments, very few people have such a coherent view of their own intellectual history, and fewer still have lived that history in such a remarkably consequential period for their chosen field.

Perhaps my favorite part of our interview was the following, where Professor Wallace reveals how he thinks about teaching economics, and macroeconomics specifically (link added):

If we were to construct an economics curriculum, independent of where we’ve come from, then what would it look like? The first physics I ever saw was in high school... I can vaguely remember something about frictionless inclined planes, and stuff like that. So that is what a first physics course is; it is Newtonian mechanics. So what do we have in economics that is the analogue of Newtonian mechanics? I would say it is the Arrow-Debreu general competitive model. So that might be a starting point. At the undergraduate level, do we ever actually teach that model?

[Interviewers] That means that you would not talk about money in your first course.

That is right. Suppose we taught the Arrow-Debreu model. Then at the end we’d have to say that this model has certain shortcomings. First of all, the equilibrium concept is a little hokey. It’s not a game, which is to say there are no outcomes associated with other than equilibrium choices. And second, where do the prices come from? You’d want to point out that the prices in the Arrow-Debreu model are not the prices you see in the supermarket because there’s no one in the model writing down the prices. That might take you to strategic models of trade. You would also want to point out that there are a lot of serious things in the world that we think we see that aren’t in the model: unemployment, money, and [an interesting notion of] firms aren’t in the Arrow-Debreu model. What else? Investing in innovation, which is critical to growth, isn’t in that model. Neither is asymmetric information. The curriculum, after this grounding in the analogue of Newtonian mechanics, which is the Arrow-Debreu model, would go into these other things. It would talk about departures from that theory to deal with such things; and it would describe unsolved problems.

So that’s a vision of a curriculum. Where would macro be? One way to think about macro is in terms of substantive issues. From that point of view, most of us would say macro is about business cycles and growth. Viewed in terms of the curriculum I outlined, business cycles and growth would be among the areas that are not in the Arrow-Debreu model. You can talk about attempts to shove them in the model, and why they fall short, and what else you can do.

Of the many things that I have learned from Professor Wallace, this one comes back to me again and again: Talk about how to get the things in the model that are essential to dealing with the unsolved problems, honestly assess why they fall short, and explore what else you can do. To me, this is not only a message of good science. It is one of intellectual generosity, the currency of good citizenship.

I was recently asked whether I align with “freshwater” or “saltwater” economics (roughly, I guess, whether I think of myself as an Arrow-Debreu type or a New Keynesian type). There are many similar questions that come up. Are you a policy “hawk” or a policy “dove”? Do you believe in old monetarism (willing to write papers with reduced-form models of money demand) or new monetarism (requiring, for example, some explicit statement about the frictions, or deviations from Arrow-Debreu, that give rise to money’s existence)?

What I appreciate about the Wallace formulation is that it asks us to avoid thinking in these terms. There are problems to solve. The models that we bring to those problems are not true or false. They are all false, and we—in the academic world and in the policy world—are on a common journey to figure out what we are missing and what else we can do.

It is deeply misguided to treat models as if they are immutable truths. All good economists appreciate this intellectually. And yet there is an awful lot of energy wasted, especially in the blogosphere, on casting aspersions at those who are perceived to be seeking answers within other theoretical tribes.

Some problems are well-suited to Newtonian mechanics, some are not. Some amendments to Arrow-Debreu are useful; some are not. And what is well-suited or useful in some circumstances may well be ill-suited or even harmful in others. Perhaps if we all acknowledge that none of us knows which is which 100 percent of the time, we can make just a little more progress on all those unsolved problems in the coming year. At a minimum, we would air our disagreements with a lot more civility.

Happy holidays.

David Altig By Dave Altig, executive vice president and research director at the Atlanta Fed


December 23, 2013 in Economics, Education, Monetary Policy | Permalink

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This's surprisingly simplistic point of view, c'mon. That particular debate is not about which model is right (all are wrong in one way or another, yes), but about what economists should do when their model turns out to not reflect real developments nearly as good as the other models do

Posted by: Konstantin | December 25, 2013 at 08:39 AM

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April 12, 2013


Higher Education: A Deflating Bubble?

There are at least two sides to every debate, but it’s becoming clearer by the day that the debate over the cost of higher education is being won by people like University of Tennessee law professor Glenn Reynolds.

A frequent writer and lecturer, and even more frequent blogger, Reynolds visited the Atlanta Fed recently to share his views with local community leaders. He reported that total student loan debt now stands at over $1 trillion—more than total credit card debt and auto loan debt combined. As these charts from the New York Fed show, the increase in total student debt over the past eight years is a result of greater numbers of students and families taking on educational debt as well as higher debt balances per student. 

One can argue that this trend is not necessarily a bad thing. Education is an investment in human capital, and if those newly acquired skills are valued highly by employers, then going to college can be a positive net present value project, even with debt financing.

And wage data reveal that these skills are indeed valuable. As this Cleveland Fed article and chart show, the median wage for a worker with a bachelor’s degree was about 30 percent higher than that of a worker with only a high school diploma in the late 1970s and grew to more than 60 percent higher by the early 2000s. However, the data also show that over the last decade the value of a college degree measured by wages has stagnated.

Wage Premium by Terminal Degree

And here begins the crux of Reynolds’s concern. The cost of attending college has continued to grow, and grow rapidly. Between the 2000–01 and 2010–11 academic school years, the cost of undergraduate tuition, room, and board rose 42 percent at public institutions and 31 percent at private not-for-profit institutions, after adjusting for inflation, according to the National Center for Education Statistics.

A stagnant wage premium with rising costs of attendance suggests that, at least on average, the value proposition of going to college is deteriorating. To make matters worse, Reynolds described students graduating with significant levels of student loan debt who often cannot find jobs that pay enough to cover the loan payments. Moreover, unlike credit card debt, student loans are not dischargeable in bankruptcy, meaning that there is no opportunity to get out from under the debt burden other than through full repayment. Reynolds told of individuals whose high levels of student debt are limiting their career choices, ability to obtain mortgages, and save for retirement. He even went on to say that student loans are affecting a much more personal market—the marriage market. After all, he says, “Who wants to marry someone with huge amounts of unpayable debt?”

Reynolds contends that ”something that can’t go on forever, won’t,” and he believes that seeing friends or family members having financial problems because of student loans is leading college students to become more cost conscious. Additionally, he notes that more and more of today’s students are focusing on majors that seem likely to offer a strong salary over time. The chart on 2009 enrollment and wage premiums by major show some support for that notion.

Wage Premiums for Four-Year and Advanced Degrees in Categories of Majors

Large fractions of students are enrolled in majors with relatively higher wage premiums, including business and engineering, but there are also substantial enrollments in education, psychology, and the humanities. For Reynolds it is not so much about seeking out the highest-wage major; instead, his advice is, “Don’t go to a college that will require you to borrow a lot of money.”

What’s the endgame? Well, he expects that when the bubble bursts, there will be less “dumb money” to be gained, students will demand a higher return on investment, and schools will ultimately be forced to adapt. According to Reynolds, colleges have two different strategic choices: increase the value of the education for the current cost, or lower the cost of providing the current level of value. And he expects the most common response will be the latter, likely involving technology such as MOOCs (massive open online courses) and other innovations in teaching methods.

When any bubble bursts, there are some casualties. In this case, it may be that some colleges do not survive once market discipline has been unleashed. Given the statistics above, you might think that it would be the small liberal arts colleges that will suffer the most, but in this video, shot during the visit to Atlanta, Reynolds argues that these colleges may actually gain from the coming shakeout.

Reynolds indicated that there is change in the air, but it’s coming slowly. The bubble may not have burst, but he sees it deflating. He noted, “A lot of people hope it will pass. They’ll muddle through without dramatic changes. And frankly I hope they’re right. But I don’t think they are.”

Photo of Paula TkacBy Paula Tkac, vice president and senior economist in the Atlanta Fed research department and

Photo of Michael ChrisztMichael Chriszt, vice president and community relations officer in the Atlanta Fed’s public affairs department

April 12, 2013 in Economics, Education | Permalink

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A bubble is when people are willing to pay more than fundamental value for an asset because they expect to be able to sell it for still more. This is a weird metaphor to use to describe the problems in higher education.

The problem in higher education is two fold. First, the state and federal governments, which used to be key financing sources, have cut back their funding radically.

Second, universities, now forced to rely on students for more of their funding, have gotten locked into a dangerous competitive game that they believe requires them to expend ever increasing sums on highly visible (and expensive) amenities, including nicer dorms and many more student services.

All this is compounded by the unconscionable changes in student loans. Currently the US profits even from so-called "subsidized" student loans, charging far more than its cost of funds. The high interest rate charged students functions as an excise tax on education. Making these loans non-dischargeable puts increasing numbers of students, especially those who've been scammed by for-profit institutions masquerading as trade schools, into a form of debt peonage that is a disgrace to a civilized country.

The solution, if we are a civilized country, is simple enough. Student loans should be, as they once were, at rates below the US government's borrowing rate, and they should be dischargeable in bankruptcy like any other debt. This alone would cut the cost of higher education dramatically for students who need to borrow.

Then, our governments should shift some of the astonishing resources they have devoted to building prisons and supporting the military-industrial complex to, instead, building our future.

There is no need to turn our state universities into online trade schools -- we could, instead, act like the richest country in the world and fund them adequately.

Posted by: GeneralWelfare1776 | April 12, 2013 at 05:44 PM

you point out that "the median wage for a worker with a bachelor’s degree was about 30 percent higher than that of a worker with only a high school diploma in the late 1970s and grew to more than 60 percent higher by the early 2000s"; but there's no counterfactual; it may be that those more intelligent & focused individuals would have commanded the same premium had they not gone to college...

Posted by: rjs | April 12, 2013 at 06:26 PM

I just did a quick back-of-the-envelope estimate regarding my daughter's college cost at a state university (paying in-state tuition).
It costs her roughly $53 for every hour she sits in a classroom. (Roughly 18K/yr in tuition, housing, etc plus what she could have made on a minimum wage job during that time).

What does the university deliver that is worth her paying that much?

Until universities can answer that question without bumbling, blushing, or bullshitting, they will continue to be at existential risk going forward.

Posted by: JS | April 15, 2013 at 01:46 PM

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