Academic journal article Federal Reserve Bank of Minneapolis Quarterly Review

The Evolution of U.S. Earnings Inequality: 1961-2002 *

Academic journal article Federal Reserve Bank of Minneapolis Quarterly Review

The Evolution of U.S. Earnings Inequality: 1961-2002 *

Article excerpt

This article summarizes the main trends in the earnings and employment distribution in the United States during the last four decades, using data drawn from the March Current Population Surveys (March CPS) covering the period between 1961 and 2002, with an emphasis on the evolution of earnings inequality. The rising overall earnings inequality has been accompanied by a large increase in earnings dispersion both among and within groups (defined by characteristics such as education or experience). A large and growing body of research, reviewed in Katz and Autor 1999, documents the increase in wage dispersion that took place between the mid '70s and the mid '90s. These facts have motivated much research aimed at revealing the underlying economic process generating the increase in earnings inequality.

Our aim in this article is twofold. First, we will revisit the empirical evidence on the trends in earnings inequality. We document that overall earnings inequality continued to increase sharply all through 2002, especially among men. Second, and more importantly, we will look at a more broad set of facts than what is usually studied in the earnings inequality literature.

After documenting the rise in overall earnings inequality, we follow the literature and document the rise in the wage premium of college graduates and the concurrent increase in the proportion of workers that graduated from college. These two facts have led many researchers to claim that the only way to explain the two trends is by a large increase in the demand for skilled workers relative to that for less-skilled individuals due to skill-biased technical change (SBTC). The computer revolution that started in the early '80s, and its spectacular growth over the last two decades, provides an appealing reason to accept the SBTC hypothesis as the explanation for the rise in earnings inequality and the widening earnings gap between college and non-college educated workers. (1) See Aghion 2002, Acemoglu 2003, and Krusell et al. 2000 for recent related literature.

We show that, once more facts are brought to bear on the SBTC hypothesis, it is unclear whether that hypothesis provides a sufficient explanation for the development of earnings inequality over the last four decades. It is an open question whether the skill level of workers should be measured by their schooling level or by their occupation. Casual observation on the way labor markets operate would indicate that employers post their vacancies and employees apply for jobs by specifying first the occupation and only second the level of education. [We show that the only marked change in recent decades in the occupational distribution has been the increase in the share of professional women.] The earnings premium of professional workers over blue collar workers rose at almost the same rate and during the same time period as the earnings premium of workers with a college degree. It is unclear how the SBTC hypothesis can explain these trends.

We emphasize that the most dramatic changes in the labor market during the past four decades took place among women. (See McGrattan and Rogerson 2004 on hours worked in the U.S. labor market.) The wage gap between men and women declined as women's educational attainment grew, and their workforce participation increased dramatically. Women made up a significantly smaller share of the workforce, yet accounted for 55 percent of the increase in the number of workers with at least some college education. Despite this fact, women experienced less of an increase in inequality than men did, and, in fact, it was in the most educated groups that women succeeded least in closing the wage gap. The SBTC hypothesis needs to address these differences among the genders to provide a sufficient explanation of the evolution of earnings inequality.

Since wage and employment decisions are determined simultaneously by forward-looking optimizing workers and employers, we look at facts, year by year, not only on the earnings distribution, but also on the employment distribution. …

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