Academic journal article New England Economic Review

Labor Markets and Earnings Inequality: A Status Report

Academic journal article New England Economic Review

Labor Markets and Earnings Inequality: A Status Report

Article excerpt

Earnings inequality has increased dramatically in the United States over the last decade and a half. Take, for example, average weekly earnings for adults who work full-time [ILLUSTRATION FOR FIGURE 1 OMITTED!. The U.S. Department of Labor (1994) has calculated that in 1979, a man at the 90th percentile of the wage distribution earned 3.2 times as much as a man at the 10th percentile. In 1992, a man at the 90th percentile earned 4.1 times as much. For women, the disparity increased from 3.1 to 3.7 over this same time period. Men at the bottom of the earnings distribution fell behind not only in relative but also in absolute terms, as average earnings for all full-time male earners fell by about 3 percent from 1979 to 1992. For women, average earnings increased by about 15 percent, so the rise in inequality was less likely to be associated with declining real earnings. While these particular calculations focus on only two points in the income distribution, the conclusion that inequality has risen markedly over the past decade and a half is supported by a large body of evidence.(1)

Earnings inequality has risen along various dimensions. Highly educated workers have gained relative to less educated workers. Experienced workers have earned increasingly more than inexperienced workers. And pay for similarly educated workers with similar length of experience has become more unequal. The only significant contrary trend is that the earnings of women have become more similar to those of men.(2) Recent evidence also shows that the increase in inequality during the 1980s was greater in the United States than abroad, and that the distribution of earnings here is much more dispersed than in other industrialized countries.

Much of the literature on earnings inequality was reviewed in a landmark survey by Frank Levy and Richard Murnane (1992). The current paper provides an overview of our present knowledge, concentrating for the most part on contributions since the publication of the Levy-Murnane study. It summarizes explanations for trends in inequality by educational attainment, by experience, within education-experience categories, and in general. A remarkably diverse array of economic factors (rather than a single dominant force) have caused the rise in earnings inequality in the United States. And although the rising education wage premium has received considerably more attention than the other aspects of inequality, new evidence suggests that growing inequality is traceable at least as much to other aspects of work skills.

This survey briefly examines the significance of two refinements to the measure of earnings - the role of unemployment and underemployment on the one hand, and the role of earnings variability on the other. Individuals with a low earnings capacity are increasingly likely to be out of work or working fewer hours, relative to those with a high earnings capacity. Therefore the trend toward greater earnings inequality looks more pronounced when one takes account of persons who work less than full-time or less than year-round.

The paper assesses how additional social and political influences have interacted with labor markets in determining inequality. Changes in taxes and transfers have served to aggravate earnings disparities in the United States over the last decade and a half, as has the increased prevalence of single-parent families. The paper concludes with some observations on past and future research themes.

Changing Returns to Education

The earnings of college graduates and non-college graduates diverged sharply in the 1980s and early 1990s, after showing little relative change during the 1970s [ILLUSTRATION FOR FIGURE 2 OMITTED]. According to the U.S. Department of Labor (1994), between 1979 and 1992, real earnings of full-time year-round male workers rose 5.2 percent for those with a college degree, while falling for those with less education. In 1992, male college graduates earned 74 percent more than high school graduates and 133 percent more than high school dropouts. …

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