Academic journal article Federal Reserve Bank of New York Economic Policy Review

The Internationalization of the U.S. Labor Market and the Wage Structure

Academic journal article Federal Reserve Bank of New York Economic Policy Review

The Internationalization of the U.S. Labor Market and the Wage Structure

Article excerpt

Beginning with the important work of Murphy and Welch (1992), a great deal of recent research has attempted to document and explain the dramatic changes in the wage distribution that occurred during the 1980s (see also Katz and Murphy 1992). Practically every income group faced a decline in real wages during the 1980s. However, workers at the 33rd percentile experienced a 14 percent drop in the real wage, workers at the 66th percentile experienced only a 6 percent drop, and workers in the upper tail of the distribution experienced a 1 percent wage increase. Therefore, the widening of the wage distribution occurred because the relative wage of less skilled workers fell dramatically during the decade.

Although these facts are indisputable, there is considerable disagreement about the causes of the increase in wage inequality. The trends can be understood in terms of a simple supply-demand equilibrium story. It is well known that the labor market entry of the large baby boom cohort in the 1970s shifted out the supply curve of college graduates, thus depressing the payoff to a college education throughout much of that decade. During the 1980s, however, the rate of increase in the supply of college graduates slowed dramatically. The relative decline in the number of new labor market entrants with a college education raised the wage gap between college graduates and less educated workers. It turns out, however, that if the elasticity of labor demand has a reasonable value, the supply shifts cannot generate the huge increase in the returns to schooling that occurred during the 1980s. As a result, it must also be the case that the demand for skilled workers shifted out by more than the demand for unskilled workers.

A number of hypotheses can explain the differential shifts in labor demand. For instance, the de-unionization the labor market probably had a particularly adverse impact on the wage of unskilled workers. Because unions "prop up" the wage of less skilled workers, the drop in the demand for union labor would raise the wage gap between skilled and unskilled workers. Some studies conclude that perhaps as much as half of the increase in wage inequality can be attributable to the decline in unions (Freeman 1993).

The relative demand for skilled workers may also have increased because of skill-biased technical change. Some studies, in fact, argue that this type of technical change explains most of the increase in wage inequality in the United States (Bound and Johnson 1992; Berman, Bound, and Griliches 1994). If the technological advances that are being introduced constantly into the labor market are good substitutes for unskilled workers and complement the skills of highly educated workers, technical change would lower the demand for unskilled labor and increase the demand for skilled labor.

The internationalization of the U.S. labor market, either through trade or immigration, probably contributed significantly to the rise in wage inequality (Murphy and Welch 1991; Borjas, Freeman, and Katz 1992; Borjas and Ramey 1994). In 1979, trade between the United States and the rest of the world was balanced: exports exceeded imports by only about 1 percent. By the mid-1980s, the trade deficit in durable goods was equal to 2.5 percent of GDP. If the imported goods compete with goods produced by relatively unskilled workers, the demand for unskilled workers would be affected by the trade deficit. The increasing internationalization of the U.S. economy also occurred because of a sizable increase in immigration. In 1980, only 13 percent of workers with less than a high school education were foreign-born; by 1990, nearly a quarter of the high school dropouts were immigrants. This paper summarizes some of the evidence linking the internationalization of the U.S. labor market with the changes in the wage structure.


There are two distinct ways in which immigration can alter the U.S. wage structure. …

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