Trends in Wage and Salary Inequality, 1967-88

Article excerpt

Earnings inequality in the United States rose in the late 1960's, stabilized for most of the 1970's, then began to grow again in the 1980's; the recent increase arises from changes in labor demand, and not demographic characteristics of U.S. workers

During the last several years, research on the distribution of income and earnings in the United States has expanded substantially.[1] In part, this reflects the perception that inequality of earnings has been increasing, leading among other results to increases in poverty. The size and composition of the middle class, and fears of a "declining middle class ," have prompted some of the analysis. Still other researchers have been concerned about the economic prospects for a new generation of young adults.

While there is now general agreement about the trend of increasing inequality, particularly during the 1980's, the causes of this increase are still unclear. Some argue that the effects of structural changes in the economy and heightened competition in the international marketplace have led to increasing inequality and diminished the prospects for greater prosperity in U.S. society. Others claim that changes in demographic characteristics of the labor force, some of which cannot be affected by public policy, are the sources of growing inequality.

The purpose of this study is to determine the relative influence of demographic characteristics and labor market factors on the patterns of national pay inequality, for the period 1967 through 1988. As in our previous work in this area,2 we focus on wages and earnings, rather than total income, and we use a measure of inequality developed by Henri Theil that is particularly appropriate for disentangling the contributions of different factors to pay inequality. We first review the recent literature on inequality to determine potential causes that are worth examining, and then present the methodology of the study. The following sections describe the results, first for demo' graphic factors--age, gender, educational attainment, and race and ethnicity--and then for labor market factors, including industrial and occupational patterns of employment and work patterns. (part-time, full-time, and overtime work).

Implications of recent literature

The empirical literature on pay inequality has several strands. Conflicting results have emerged, in part because of differing units of analysis, definitions of income, measures of inequality, and periods of study. It should be noted at the outset that there are substantial differences in patterns of pre-tax and transfer earnings compared with the distribution of total income including transfers; because transfers offset some of the inequality in earnings, inequality in pre-transfer income has increased more than inequality in post-transfer income.[3] In addition, the distribution of family or household earnings (or income) differs from the distribution of individual earnings because the process of household formation--including increases in the numbers of female-headed households with low earnings and two-earner households with substantially higher earnings-- adds its own complexity to changes in earnings inequality. Finally, while trends in poverty do depend on the distribution of household income, they involve only the lower tail of the distribution, while the concern over the "declining middle class" concentrates on the middle of the distribution, as variously defined.

This analysis concentrates on the inequality arising from employment, because that source of inequality is fundamental to every other form. We therefore examine individual wage and salary income, rather than household or family resources or total income. And, because we are concerned with welfare and purchasing power rather than productivity, we analyze annual earnings rather than wage rates.

The trends in inequality have by now been relatively well established. Peter Henle and Paul Ryscavage were among the first to find increasing inequality among male earners--but not among female earners---beginning around 1966,a based on annual data from the Current Population Survey (CPS). …