The wage structure web

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The wage structure web

  1. 1. The Wage Structure
  2. 2. Introduction and Overview <ul><li>Explain the positive skew in earnings distribution. </li></ul><ul><li>Understand wage inequality in the United States. </li></ul><ul><ul><li>The facts: patterns and trends in the data. </li></ul></ul><ul><ul><li>The explanations: factors that have led to increased inequality. </li></ul></ul>
  3. 3. Basic Shape of the Wage Distribution <ul><li>Positively skewed: </li></ul>Frequency Wage Human capital theory can explain the shape of this distribution.
  4. 4. Distribution of Ability Worried? http://www.iqtest.com/
  5. 5. Human Capital Theory <ul><li>Individual’s with the highest ability have the greatest incentive to invest. </li></ul><ul><li>This stretches out the earnings distribution at the top end. </li></ul>Years of Schooling $ MRR1 r S2 S1 MRR2
  6. 6. Measuring Inequality <ul><li>The spread between wages at different percentiles of wage distribution is a measure of wage dispersion. </li></ul>Density Density Wage below which 90% of population earns Wage below which 10% of population earns w 10 w 90 Wage w 10 w 90
  7. 7. Measuring Inequality <ul><li>Percent change in wages from 1963 to 1995: </li></ul><ul><li>Why does this equal the percentage change in average wages? </li></ul><ul><li>=ln[w 95 /w 63 ] </li></ul><ul><li>=ln[w 95 /w 63 -w 63 /w 63 +1] </li></ul><ul><li>Recall that ln( x +1) ≈ x when x is small. Thus, </li></ul><ul><li>Can look at changes at different points in the earnings distribution. </li></ul><ul><li>For example: One can examine the percentage change in wages at the 10 th , 50 th and 90 th percentile of the wage distribution. </li></ul>
  8. 8. Percent Change in Weekly Wage by Percentile, 1963-1995
  9. 9. Percent Change in Weekly Wage by Percentile, 1963-1995
  10. 10. Timing of Increasing Inequality
  11. 11. International Comparisons
  12. 12. Explaining Increased Inequality <ul><li>In theory: two possible reasons: </li></ul><ul><ul><li>Increases in the dispersion of skills. </li></ul></ul><ul><ul><li>Increase in the returns to skills . </li></ul></ul><ul><ul><li>Note: Some skills are observable to researchers (education, experience), others are unobservable to researchers (motivation, charisma). </li></ul></ul><ul><li>We will start by looking at changes in the returns to observable skill . . . </li></ul>
  13. 13. Trend in Educational Wage Gap
  14. 14. Wage Growth by Demographic Group, 1963-1995 25.1 College 4.5 Some college 5.7 High school -4.4 Less than high school Education 17.1 Women 0.9 Men Percent Change in Real Wage Group
  15. 15. Changes in the Returns to Experience
  16. 16. What are residual wages? Education (X) Log Wage Regression Line Slope= β wage residual (u) α
  17. 17. Increasing Residual Wage Dispersion Education Log Wage Education Log Wage Over time, we have seen increasing residual wage dispersion.
  18. 18. Changes in Residual Wage Gap Residual Wage : wage after controlling for age, education, experience and region of residence.
  19. 19. Where Have Changes Occurred? <ul><li>Observable skill quantities ( X i =education, experience) </li></ul><ul><ul><li>Increasing spread in educational attainment </li></ul></ul><ul><ul><li>Increasing spread in experience </li></ul></ul><ul><li>Returns to observable skill ( β ) </li></ul><ul><li>Returns to unobservable skill ( u i ) </li></ul><ul><li>  </li></ul><ul><li>  Percentage Change in the 90 th -10 th Wage Differential </li></ul>Juhn, Murphy, Pierce 1993 .208 .128 .035 .373 1964-1988 Unobservable Skill Observed Skill Returns Observed Skill Quantities Total Change  
  20. 20. Why Did Wage Inequality Increase? <ul><li>Demand-side factors </li></ul><ul><li>Supply-side factors </li></ul><ul><li>Institutional factors  </li></ul>
  21. 21. Demand-Side Factors Relative Employment Of Skilled Workers Relative Wage Of Skilled Workers S D 0 e 0 w 0 D 1 w 1 <ul><li>Major Demand Factors </li></ul><ul><li>Skill-Biased Technological Change </li></ul><ul><li>Globalization and Trade </li></ul><ul><ul><li>Imports hurt less-skilled </li></ul></ul><ul><ul><li>Exports benefit more-skilled </li></ul></ul>
  22. 22. Supply-Side Factors Relative Employment Of Skilled Workers Relative Wage Of Skilled Workers S 0 D 0 e 0 w 0 <ul><li>Major Supply Factors </li></ul><ul><li>Cohort size (i.e. the Baby Boomers) </li></ul><ul><li>Female Labor Force Participation </li></ul><ul><li>International Immigration </li></ul><ul><ul><li>Influx of low-skilled immigrants in the 1980s but not big enough to cause relative supply of skilled workers to fall. </li></ul></ul>S 1 w 1
  23. 23. Shifts in Supply and Demand Relative Employment Of Skilled Workers Relative Wage Of Skilled Workers S 0 D 0 e 0 w 0 D 1 w* Demand shifts must outweigh supply shifts e* S 1
  24. 24. Institutional Factors: Industry Wage Differentials <ul><li>Fact: Workers in some industries earn more than workers in other industries. </li></ul><ul><ul><li>True even after controlling for observable worker differences. </li></ul></ul><ul><li>During the 1980s: </li></ul><ul><ul><li>The proportion of less-educated workers in low-paying industries </li></ul></ul><ul><ul><li>The proportion of highly-educated workers in high-paying industries </li></ul></ul><ul><li>Also, industry wage differentials </li></ul><ul><li>This might explain part of the reason why the returns to education appears to have increased. </li></ul>
  25. 25. Institutional Factors Decreases in Unionization <ul><li>Fact: Unions tend to increase wages by as much as 15%. </li></ul><ul><li>Union membership for men 1973-74 = 30.8% </li></ul><ul><li>Union membership for men 1993 = 18.7% </li></ul><ul><li>Changes by Education: </li></ul><ul><ul><li>Less educated men = </li></ul></ul><ul><ul><li>College graduates increased slightly. </li></ul></ul><ul><li>Thus, the decline in unionization for workers with less education may also explain part of the increase in the returns to education. </li></ul>
  26. 26. Institutional Factors: Decline in the Real Value of the Minimum Wage <ul><li>Real value of minimum wage has eroded over time. </li></ul><ul><li>Less-educated workers most often earn minimum wage </li></ul><ul><li>Could explain drop in wages of less educated relative to wages of more educated. </li></ul>

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