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The Most Important Investment…

We spend a lot of time writing and talking about financial issues. Investments, insurance, budgeting, credit, taxes all are important. None, however, are as important as the investments we make in ourselves, our human capital, which allows us to earn money and reach toward the American Dream.

I recently read the article “Education and Synthetic Work-Life Earnings Estimates” published by the U.S Department of Commerce in September of 2011. (The full article may be accessed here.) It examines the earnings of workers, whether full-time and full-year or part-time and part-year, to see what characteristics make a difference in earnings ability. To me, the most interesting table was Table 4, where a regression analysis allows us to see the “independent” effects of workers’ characteristics on their earnings. The broad characteristics that were controlled are education, gender, race/ethnicity, age, citizenship, language and region of the country in which they reside. While not earth shattering news, it may just help one young person in our readership make a better choice in the future, if we summarize the findings.

First, there are regional variations in earnings, as the cost of living varies across our country. While controlling for the other factors, workers in the Pacific and New England regions, on average, earn greater incomes. Earnings increase with the age of the worker and reach a peak in the age category of 45-49 years old. This familiar hill shaped age/earnings profile results from workers’ experience adding to their productivity when they are younger, only to be overcome by depreciation and obsolescence as they pass middle age and move toward retirement. (For me, a soon to be 60 year old, this was hard to write.)

Unfortunately, civil rights questions remain in our labor market. While holding educational level, age, citizenship, language and region constant, we continue to find males, on average making over $1,000 more each month, than their female counterparts. Additionally, all non-white races make less than their comparable white neighbors. Clearly, more work needs to be done to assure that our 21st Century labor market provides equal opportunity to all. To make a difference in labor market discrimination, those who can need to act to reduce discrimination across society.

As expected, greater levels of education enhance earnings. Compared to a high-school graduate with the same characteristics on all other factors, those with higher levels of education earn more, with a professional degree having an average advantage of $63,643 per year. Not surprisingly, those without a high school degree, earn over $4,000 less than those with a high-school degree. A bachelor’s degree adds slightly less than $2,000 per month to the income of a household, when contrasted to an otherwise similar high school graduate. It cannot be said loud enough, or often enough, that the greatest equalizer in our country is education and, thankfully, it is something that is under the control of the one who seeks the education.

It is of interest to note a couple of other results. One is quite intuitive, while the second quizzical in nature. The greater the ability to speak English is found to increase average annual earnings or, rather, the inability to speak English lowers annual earnings. This is quite intuitive, as communication is a key to working relationships and the dominant language in the United States continues to be English. Not as intuitive is the result which indicates that those workers who are not citizens earn significantly less income (about $200 less per month) than do native-born citizens. Surprisingly, at least to me, was the result that native-born Americans earn, on average, $100 less per month than a United States citizen who has become a naturalized citizen since arriving in our country. Admittedly, this is not a huge amount of money but it does cause one to reflect on our new citizens. They work hard in support of their freedom to seek financial success. Their efforts need to be remembered by many of us, as a way to reinforce our continuing engagement with our country’s economy.