As in more traditional dual economies, some members of the American low-wage sector aspire to transition into the FTE sector. The mechanism is education, which is hard for members of the low-wage sector for two reasons. First, education requires expenditure over a long period of time and resources that most members of the low-wage sector lack. Second, the FTE sector has made this transition increasingly costly over time. I discuss these barriers in turn.
It may appear that education is far more difficult than the tradition of moving to the city in developing economies. But moving to the city was only the start of a long and uncertain process of finding gainful employment in the industrial economy. Moving to a city to find a good job started later and did not last as long as current education does, but the older process still created a formidable barrier to the initial change in location. Economists described the possibility of getting an urban job as random, while aptitude for learning is also important today. Nonetheless, even if a member of the low-wage sector does well in school, he or she faces uncertainty similar to that in developing economies when seeking a high-paying job.1
In our modern dual economy, the student needs to start the transition process as a young child and continue for sixteen years or more to get a college education. Recalling from chapter 3 that if current trends continue, one in three black males will go to jail, it must be hard for many black male children to make such long-range plans. Clearly, some urban black families do not have any members in jail, and this obviously helps a small child imagine more possibilities. But when that child gets to junior high, the level when male black students tend to fall behind, he knows the odds are against him in the wider world. It becomes harder and harder for his parents to keep him motivated in school.2
These problems continue into college. Many poor students drop out midway and do not graduate with a college degree—an entry ticket to the FTE sector. Only one-third of college students from the bottom quarter of households graduate, while two-thirds of students from the top quarter do. Both ability and class matter, and math tests show that ability matters more at low income levels. The probability of graduating from college for students who scored low on the math test was four times as high for rich students as poor ones. This gap decreases as scores improve, but graduation is still about twice as likely for rich kids than poor kids.3
If a student manages to complete college, what are his or her chances to find a job that will lift him or her out of the low-wage sector? White students have a leg up on black students. Most recent graduates who are white find jobs through a social network of relatives, peers from college, and friends who inform them about and recommend them for jobs. Black urban college graduates are not likely to know many people with jobs in the FTE sector or have many school mates who are moving into it. Their chances of finding good jobs are correspondingly lower than for comparable whites, and they have to find jobs in education, social work, or government. The only jobs they find in mainstream businesses are those directed at or concerned with African Americans.4
Most white people are unaware of this difference in social capital. They describe their own careers as the results of their own efforts, not recognizing the contributions of families, friends, and even the government. They therefore find it difficult to realize that a poor student in a poor urban neighborhood with poor schools and poor neighbors does not have the same social capital they do. Members of the FTE sector, having little personal contact with members of the low-wage sector, are particularly subject to this kind of blindness. Fish do not know they are living in water, and members of the FTE sector are not aware of the social capital that surrounds and sustains them.5
The problems of K–12 education will be discussed more fully in part III. I now discuss changes in the availability of college education to aspiring members of the low-wage sector, because a college degree is a ticket into the FTE sector. Public universities have been subject to the same starvation diet for funding as other state spending that benefits members of the low-wage sector. State appropriations for higher education in real dollars have fallen 40 percent since 1980. State funding for the 100 top public research universities fell from 38 percent of their budgets in 1992 to 23 percent in 2010. State and local spending on higher education fell from 60 percent of total spending on higher education in 1975 to 35 percent in 2010.6
Declining state support for higher education leads directly to higher tuition charges to students. Inflation-adjusted tuition and fee charges rose by 250 percent at flagship state universities from 1980 to 2012, by 230 percent for all state university state universities and colleges, and by 165 percent for community colleges. These tuition increases are another barrier in the education link between the low-wage and the FTE sector.7
Students’ tuition increased as the dual economy destroyed the mechanism that used to finance education. Parents traditionally paid for kids’ education, both directly and through property taxes for education. In the dual economy, low-wage workers cannot pay for their children’s college, and the FTE sector is unwilling to help them. There is a need for inter-sector as well as inter-generational transfer, and it is not forthcoming.
Tuition increases are a major source of the student-loan crisis that holds back so many young people today. The debts are mainly to for-profit colleges and secondarily to community colleges. Most of these debtors did not finish college or get skills to move them into the FTE sector; they are still in the low-wage sector—but now with large (especially for them) debts.8
Since states support public universities and colleges has decreased, federal help for poor students turned to providing Pell Grants, GI Bills, and other forms of financial aid to individual students. Private for-profit schools like the University of Phoenix began to accept these forms of government support. They were accredited to receive federal student support in 1972, and their focus is to increase the number of students in the short run—to keep up their stock prices—rather than to help students and preserve knowledge in the long run. The private universities have been very profitable, but they typically have not educated students sufficiently to make it into the FTE sector.9
The federal government has found it impossible to control the for-profit colleges that have sprung up to profit off the individual subsidies. For-profit colleges enroll only 12 percent of college students, but they account for almost half of student loan defaults. The government is trying to contain the growing problem of for-profit colleges, but regulators are caught between an industry that complains of victimization and critics who say not enough is being done to prevent fraud and the abuse of students from the low-wage sector.10
The combination of students who do not complete college and private colleges that do not deliver degrees that help their graduates gain employment in the FTE sector has left many poor students still in the low-wage sector but now burdened with student debts. These debts cannot be discharged unless the former student can demonstrate “undue hardship” from the loan. The statute does not define “undue hardship,” and many courts use the Brunner test, derived from a 1987 opinion. This standard includes persistent poverty and a good-faith effort to pay the loan. In the view of some more recent opinions, this standard further requires hopelessness that conditions will improve. In other words, the student faces a double bind: if she tries to transition to the FTE sector, she is hampered by her student loans. Only if she foregoes this ambition can the student loan be discharged. In New Jersey, even death may not bring a reprieve from student loans.11
Lewis argued more than fifty years ago that the capitalist sector had an incentive to keep earnings in the subsistence sector low. The FTE sector illustrates this aspect of the dual economy in a web of policies that now combine to keep earnings in the low-wage sector low. The New Federalism of Nixon and Reagan reduced federal aid to the states, which in turn reduced public support for state universities. Students were forced to pay more for their college education than the postwar generation, and they borrowed to fund their education. The FTE policies of deregulation and privatization allowed student loans to grow rapidly without government oversight or regulation, leading to widespread abuses of borrowers by the business firms that administer these loans. The FTE sector enlarged the effect of student loans by making them hard to reduce even in bankruptcy. And the FTE policy of privatization allowed for-profit colleges to receive student loans from the government and grow without providing students with the education to move into the FTE sector. The for-profit colleges advertise widely to attract students and government loans while lobbying the government to preserve their status.
Student loans are now held by more than forty million people who owe more than $1.2 trillion in student-loan debt. This debt is now the second largest class of consumer debt, behind mortgages, and it has a depressing effect on spending. Lower spending in turn reduces the demand for labor in the low-wage sector, helping to keep wages flat as shown in figure 2. And the growth of student debt makes the transition from the low-wage sector to the FTE sector ever more difficult.12
This was not inevitable. Other countries do not have this debt problem. Even if public policies force students to borrow for their college education, loans can be structured differently than they are in the United States. Since education builds human capital that lasts for most of a lifetime, it is more like investing in a house than in a car. Students could be asked to pay their loans back over thirty years, the modal length of home mortgages today. This would reduce the monthly payment and burden on the student. Alternatively, repayments could be keyed to earnings, starting a threshold near the entry to the FTE sector and taking a very low percentage of earnings above that.13
The problems of American student loans can be seen in the experience of one unlucky borrower, Liz Kelley. She enrolled in a private college when she was already married and had children. She was a nontraditional student, but a reasonably typical low-wage worker trying to make a transition to the FTE sector. Kelley borrowed to pay for college and graduated with a degree in English in 1994. Her debt at graduation was about $42,000 in 2015 dollars. This is close to the debt of a typical college graduate, who borrows about $32,000 to attend a private college. Despite her degree in English, Kelley did not find a job, and opted to go to law school. This delayed the obligation to repay her college loan and added $37,000 to her debt in the first three semesters.
Kelley then became seriously ill and required extensive hospitalization. She dropped out of law school and decided that her best bet was to be a teacher. To be able to earn a good salary, she needed more schooling. Her husband was working, and she had to borrow for both child care and her added schooling. She stayed in grad school from 1999 to 2004, postponing repayment of her educational loans. The interest on her loans kept accumulating at 8.25 percent, adding $60,000 to her debt. That debt, including both the loan and the accumulated interest, totaled just under $200,000.
Kelley’s husband lost his job in the 2008 financial crash. The couple lost their house and divorced. She consolidated all her loans at 7 percent interest; the total had grown to $260,000. She tried to help one of her children in college and enrolled briefly in another graduate program. Kelley’s loan servicer told her that her loan forbearance would expire in sixteen months. She now owed just over $400,000. If she could not pay, the loan servicer would garnish her wages and Social Security.
Kelley, now 48, would like to save for her retirement, but she is obligated to pay $2,750 a month for the next thirty years. She would like to declare bankruptcy, but federal law does not allow this solution for student loans. She is not bitter, saying, “I am not a victim, I made choices.”
That is true, but it shows how hard it is for someone to make the transition from the low-wage sector to the FTE sector through education. In previous generations, parents paid for much of college education through direct help and education taxes. Public universities offered degree programs either without or with only modest tuition fees. This is all gone now, and aspiring students have to finance their own education. Kelley has come far, but still has a way to go at almost fifty years of age.14
The decline in mobility between the two sectors is apparent in aggregate data. There is an inverse relation between inequality and income mobility, which the chair of the President’s Council of Economic Advisers dubbed “The Great Gatsby Curve.” This association appears in comparisons between countries and also within areas of the United States. It is harder for people in unequal societies to move up into a higher income. There are many mechanisms that produce this relation, and the difficulty of making a transition from the low-wage sector to the FTE sector is one of them. Lack of FTE support for public education is why a fine teacher like John-David Bowman, introduced in chapter 2, is stuck in the low-wage sector despite his college degrees.15