Decomposing the Education Wage Gap: Everything but the Kitchen Sink

By Hotchkiss, Julie L.; Shiferaw, Menbere | Federal Reserve Bank of St. Louis Review, July-August 2011 | Go to article overview

Decomposing the Education Wage Gap: Everything but the Kitchen Sink


Hotchkiss, Julie L., Shiferaw, Menbere, Federal Reserve Bank of St. Louis Review


The authors use a multitude of data sources to provide a comprehensive, multidimensional decomposition of wages across both time and educational status. Their results confirm the importance of investments in and use of technology, which has been the focus of most of the previous literature. The authors also show that demand and supply factors played very different roles in the growing wage gaps of the 1980s and 1990s.

BACKGROUND

There is a clear consensus in the economics literature that the gap in wages between more highly skilled and less-skilled workers has been increasing. Research findings on this topic agree that the gap began to widen considerably in the 1970s (for example, see Piketty and Saez, 2003). Much of the focus on the growing wage gap is motivated by its implications for income inequality. Whether income inequality serves as an engine of economic growth by providing powerful incentives or acts as a hindrance to economic potential, a clear picture of the driving forces behind its growth is essential to inform the debate.

Much of the literature places the blame for the growing skills wage gap on increasing returns to postsecondary education. Ingram and Neumann (2006), however, argue that years of education is a weak measure of skill in the analysis of wage distribution and that much more skill heterogeneity exists among workers. They find that the return to years of education remains constant after controlling for skills. However, given the high degree of correlation between education and skill and the fact that education is typically the mechanism through which one achieves a higher skill level, this paper focuses on education-based wage differentials rather than skill differentials and refers to individuals with more education as highly skilled workers and those with less education as lower-skilled workers.

Figure 1 uses data from this article's analysis to show how the wage gaps between education groups have changed from 1970 to 2000. Guvenen and Kuruscu (2007) find that the overall wage inequality between the college group and the high school group rose only modestly during the 1970s because the between-group inequality was actually falling as within-group inequality was rising. This is consistent with the means plotted in Figure 1; the gap between high school and college and the gap between college and more and less than college (between-group comparisons) fell fairly dramatically, but the gap between high school and less than high school and the gap

between graduate and college (both could be considered more within-group comparisons) have risen. After 1980, however, the wage gaps between all but one pair of education groups grew, with some moderation of that growth since 1990.

[FIGURE 1 OMITTED]

If the labor market can be thought of as two sectors--one that employs skilled workers and one that employs less-skilled workers--the literature suggests multiple supply and demand reasons for the earnings gap growth. The most widely hypothesized reason for the increase in the earnings gap is an increase in demand for skilled workers resulting from technological change, or skill-biased technological change. As industries/ firms increase the adoption of computer-based technologies into their production processes in response, for example, to the decline in the price of technology or the abundance of relatively cheap skilled labor, their demand for skilled workers increases. The "skilled worker" in this case includes those who know how to use the technology and those whose productivity is enhanced by computers.

Autor, Katz, and Kearney (2006) find that computerization has not only increased the demand for highly skilled workers (those with abstract thinking-type jobs complemented by computers), but has also decreased the demand for intermediate-skilled workers (those with routine task-type jobs easily replaced by computers). This increase in demand for skilled workers--either ceteris paribus or accompanied by a decline in demand for intermediate-skilled, less-educated workers--will increase the education wage gap. …

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