Academic journal article Brookings Papers on Economic Activity

Long-Run Changes in the Wage Structure: Narrowing, Widening, Polarizing

Academic journal article Brookings Papers on Economic Activity

Long-Run Changes in the Wage Structure: Narrowing, Widening, Polarizing

Article excerpt

FROM THE CLOSE OF WORLD WAR II TO 1970--the year the Brookings Papers on Economic Activity commenced publication--America enjoyed widespread prosperity. Not only did the national economy grow rapidly, driven by robust productivity growth, but all parts of the income distribution expanded at fairly similar rates. America was "growing together." But in the mid-1970s economic growth slowed. By the early 1980s the wage structure had begun a period of widening that has lasted until the present day. Even though productivity growth surged again starting in the mid-1990s, the benefits of economic growth have been concentrated at the top end of the distribution. (1) America has been "growing apart."

These "growing together" and "growing apart" patterns are evident in figure 1, which compares real income growth across the family income distribution for the postwar period before 1973 with that after 1973. Before 1973, real income growth was a bit faster near the bottom of the distribution and somewhat slower near the top, making the changes modestly equalizing. In sharp contrast, from 1973 to 2005 family incomes virtually stagnated for the lowest quintile but grew more than three times as rapidly for the top 5 percent as for the middle quintile.

[FIGURE 1 OMITTED]

Since most Americans make their living from work, it should not come as a surprise that changes in the labor market and the distribution of wages have been the driving force behind the rising disparity in the economic fortunes of American families. (2) In this paper we document the nature of rising U.S. wage inequality since 1980 and place the recent changes within a century-long historical perspective to understand the sources of change.

The widening of the wage structure that began in the early 1980s differed markedly from the wage structure changes of the early to mid-twentieth century. The wage structure narrowed substantially during the first half of the twentieth century and was relatively stable during the 1950s and 1960s.

The spreading out of the wage structure since 1980 occurred in two stages. From 1980 to around 1987, wage inequality increased in a rapid and monotonic fashion: wages at the top grew most rapidly, those in the middle less rapidly, and those at the bottom the least of all. Since the late 1980s, wages at the upper end of the distribution have continued to grow rapidly relative to the middle, but the lower end has not lost out relative to the middle. These recent wage structure changes have been associated with a polarization of the labor market, with employment shifting into high- and low-wage jobs at the expense of middle-wage positions. (3)

Why has the wage structure widened so much since 1980? A popular explanation attributes the primary role to an increase in the rate of growth in relative demand for more-skilled workers, due to skill-biased technological change and a reorganization of work driven by the spread of computer-based technologies. (4) Globalization pressures, eroding labor market institutions, and changes in the social norms that constrain pay disparities have also been offered as explanations, and each appears to have played some role? Our focus is on reassessing the skill-biased technological change hypothesis in a long-run historical context.

Skill-biased technological change is not a new phenomenon. Rather, it has driven rapid secular growth in the relative demand for more-educated workers for at least a century. During most of the twentieth century, the narrowing of the wage structure came about largely because the supply of skills grew faster than did the demand for skills. Growth in the relative demand for skills was produced largely by skill-biased technological change. Growth in the supply of skills was due primarily to the rising educational attainment of successive cohorts. That, in turn, was fueled by increased access to public high schools and later to colleges and universities. …

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