The Historical Ratio Between Dropout and High School Graduate Wages
Alex Nowrasteh and Krit Chanwong
In a 2003 paper, economist George Borjas used an innovative method to controversially find that immigration had a negative effect on the relative wages of native-born workers who compete with immigrants, especially high school dropouts. Borjas’s explanation is simple: the labor demand curve slopes downward. Suffice it to say this paper launched a rush of academics studying the topic (here’s a good summary review of the literature).
Borjas categorizes the labor force into four distinct groups based on skill sets: high school dropouts, high school graduates, college dropouts, and college graduates. Further, he assumes that workers with these different education levels have low substitutability. Since high school dropouts make up less than a third of the total immigrant population, it makes sense to focus on studying their impact on the relative wages of US-born dropouts. As such, an influx of immigration should lead to a decline in the relative wages of native-born high school dropouts compared to other groups of workers by education.
Borjas’s model, however, deviates from other models of human capital. As David Card notes, most labor economists separate the labor force into two broad groups: high school equivalents and college equivalents. Papers that investigate the effect of immigration on wages using the two-group model usually find no negative effect of immigration on native-born wages.
Let’s assume that dropouts and high school graduates are not substitutes in the labor market. We should expect the high school graduate wage premium to vary over time as the US labor force becomes more educated. Moreover, we should also expect variations in the wage premium of high school graduates to be positively correlated with the supply of high school dropouts. This is because a boost in the number of dropouts will increase their total labor supply. This labor supply shift would reduce the relative wages for dropouts and thus increase the disparity between dropout and high school graduate wages. Does this happen?
To investigate this, we extract prime-aged (25–54) earnings microdata from the Annual Social and Economic Supplement of the Current Population Survey. We then divide this population into two groups: high school graduates (defined as people whose highest educational attainment is the 12th grade) and high school dropouts (defined as people whose highest educational attainment is less than the 12th grade). Finally, we plot the wage ratio between the average high school dropout and graduate.
Figure 1 plots the wage ratio between the average dropout and high school graduates from 1964 to 2019. This ratio declined from 1964, reaching a low of 0.668 in 1994 before jumping again to 0.8 in 2017. This shows that the dropout-graduate wage ratio did not remain constant after 1960, directly implying that the high school graduation wage premium increased during this period.
Figure 1 seems to be consistent with the broader economic literature. Economists Claudia Goldin and Lawrence F. Katz, for example, found that the high school graduate premium rose after 1980, although the magnitude of this rise was lower than the college graduate premium. It seems, then, that the high school wage premium has changed since 1964. Did immigration affect this?
Figure 2 plots the high school wage premium (defined as the log inverse of the dropout-graduate wage ratio) and the relative supply of high school graduates to dropouts (defined as the log number of high school dropouts subtracted by the log number of high school graduates) from 1964 to 2019.
Figure 2 shows that the relative supply of high school dropouts to graduates is negatively related to the high school wage premium. In other words, an increase in the number of dropouts is correlated with a fall in the high school wage premium. We also estimate that a 10 percent increase in dropouts relative to high school graduates is correlated with a 13.4 percent reduction in the graduate wage premium. These results are the opposite of what we’d expect if more dropout immigrants lowered the wages of dropouts overall in the United States. Of course, this is just a simple point that should be subjected to more rigorous theoretical and econometric analysis. Yet the above illustrates a strong negative correlation between the supply of high school dropouts and the high school wage premium.
Figure 2 also presents strong evidence that high school dropouts and graduates are substitutes. A large increase in the supply of high school dropouts would increase the supply of workers applying for the same jobs as high school graduates. This may reduce the wages of high school graduates in relation to dropouts, thus reducing the high school graduate wage premium. The high degree of substitutability between high school dropouts and graduates also seems to be consistent with some findings in the economic literature. The takeaway is that the line between dropout and graduate is thinner than we thought.