Education is an important determinant of income — one of the most important — but it is less important than most people think. If everyone had the same education, the inequality of income would be reduced by less than 10%. When you focus on education you neglect the myriad other factors that determine income. The differences of income among people who have the same education are huge.
I think I know what he’s saying–if you regress income on education and other factors, and then you take education out of the model, R-squared decreases by 10%. Or something like that. Not necessarily R-squared, maybe you fit the big model, then get predictions for everyone putting in the mean value for education and look at the sd of incomes or the Gini index or whatever. Or something else along those lines.
My problem is with the counterfactual: “If everyone had the same education . . .” I have a couple problems with this one. First, if everyone had the same education, we’d have a much different world and I don’t see why the regressions on which he’s relying would still be valid. Second, is it even possible for everyone to have the same education? I majored in physics at MIT. I don’t think it’s possible for everyone to do this. Setting aside budgetary constraints, I don’t think that most college-age kids could handle the MIT physics curriculum (nor do I think I could handle, for example, the courses at a top-ranked music or art college). I suppose you could imagine everyone having the same number of years of education, but that seems like a different thing entirely.
As noted, I think I see what Kahneman is getting at–income is determined by lots of other factors than education–but I’m a bit disappointed that he could be so casual with the causality. And without the causal punch, his statement doesn’t seem so impressive to me. Everybody knows that education doesn’t determine income, right? Bill Gates never completed college, and everybody knows the story of humanities graduates who can’t find a job.