New college graduates in caps and gowns
Students graduating from Grove City College in Pennsylvania Keith Srakocic/AP

In cities that gain college graduates, wages rise but so do rents, resulting in a cost burden for the least advantaged.

It’s abundantly clear that in today’s economy, the ability to attract and mobilize highly educated people—so-called human capital—is the key factor in the the wealth of nations as well of that of cities. But the driving force of talent in economic growth also contributes to our worsening divides. While metropolitan areas with more educated people have higher levels of income, they also have higher housing costs. And the burden of those costs falls hardest on the less educated.

A working paper by urban economist Richard Green, of the University of Southern California, and Jung Choi, of the Urban Institute takes, a deep dive into this conundrum, using detailed data from the U.S. Census, the American Community Survey, and the longitudinal Panel Study of Income Dynamics to track the impact of college graduates on wages and rents across U.S. metros. The data spans the more-than-three-decade period from 1980 to 2013.

First, the good news: Having more college graduates in a metro means higher wages for everyone. A 1 percent increase in the share of college graduates brings a 1.4 percent increase in wages across the board, even after controlling for sorting—that is, an individual’s choice to move to an area with lower rents or higher paying jobs, or because of other factors.

But these wages gains accrue disproportionately to college grads. A 1 percent increase in the share of college graduates leads to a 1.7 percent increase in hourly earnings for the same group. Meanwhile, those with a high school degree or less see an increase of less than 0.7 percent.

Now the bad news: The increase in wages associated with college grads tends to translate into higher housing costs. Although college grads tend to earn more than enough to cover these costs, less advantaged, less educated groups end up spending a far greater share of their income on housing.

Overall, a 1 percent increase in college grads leads to a roughly 2.5 percent increase in the cost of rent. (To study this, the researchers used a smaller sample of only renters.) This rent increase is highest for college grads—a 1 percent uptick in their share of population leads to a 3 percent increase in the rent they pay. Meanwhile, there was only a 1.9 percent increase in the rents paid by those who did not graduate from college. For the less educated, higher housing costs negate the wage increase brought about by having more college grads in the metro area.

The differential impact of college grads and highly educated economies can be seen even more clearly in rent burdens borne by different groups. Here the study finds that more educated groups have more residual income—i.e., the amount of money left over after paying for housing. Even though college graduates experience the highest rent increases, their wages are more than enough to cover the difference.

The opposite is true for less educated groups. After the study controls for sorting effects, it finds that the groups hardest hit by rent increases are those who did not graduate from high school, followed by those who graduated from high school only.

Furthermore, “movers”—those who move from a less educated metro to a more educated metro—gain a smaller increase in residual income than “stayers,” who remain in a metro as its overall level of education rises. College graduates who do not move actually experience a positive increase in residual income in the places that see the largest increases in college grads. The less educated who move to metros with higher shares of college graduates, on the other hand, see a decrease in their residual income. This is the direct result of increased housing costs, which negate any wage gains that accrue to them.

But what about homeowners, who experience greater appreciation of their home values in more educated places? This too is likely to confer disproportionate benefits on the highly educated, who are also more affluent and more likely to own their homes.

The homeownership rate for college graduates is 68 percent, compared to 47 percent for those who completed some college, and 38 percent for high-school dropouts. Here, the paper says that college grads benefit from greater increases in housing values and housing wealth as the share of college grads in a metro rises. The less educated see small increases in their home equity, as well as being less likely to own their homes in the first place.

Simply put, the growth in college grads strongly favors highly educated, high-skill workers over lower-skilled, less advantaged groups. While both high- and low-skill workers see their wages rise in highly educated places, only the more educated are able to bear the burden of higher housing costs, and they gain from considerable appreciation in the value of their homes.

For the less educated and less skilled, rising housing costs eat up any gains in wages that come from living in a metro with more college grads. Or, as the study puts it, the “rent spillovers” from the increase in the share of college grads exceed the “wage spillovers.” For highly educated people, spillovers raise wages and rents by roughly equal amounts. For those without college degrees, a higher proportion of college graduates generates rent hikes that overtake wage increases.

This class divide in wages and housing costs is a key factor in rising economic inequality. It’s a disturbing tale of two trickle-downs, where the trickle-down effect on rent outpaces the trickle-down effect on wages for those least able to shoulder the cost.

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