1. An Empiracal Study of the Middle Skilled Workers Transition into the Lower Class
Olufemi T. Adedayo-Ojo
Economics Department
University of Maryland College Park
Dr. Ethan Kaplan
Abstract
A Bachelor’s degree college education is deemed necessary today in America, having grand
influences on earning potential, job prospects, and perceived intelligence. The skill level of
workers is determined by their educational background. Highly skilled workers are considered to
have higher education, middle skilled have a Bachelor’s degree, and unskilled have a high school
education or lower. Earning a Bachelor’s degree however, may not be enough to maintain a middle
class living. Prior research done suggests that a Bachelor’s degree often is not enough. This paper
utilizes The Bargaining Theory of Wages to investigate why Bachelor’s degree holders today do
not have the same class security they once had. The Bargaining Theory of Wages “holds that
wages, hours, and working conditions are determined by the relative bargaining strength of the
parties to the agreement.” Thus the hypothesis this research test is that, if there has been a
substantial increase in the number of Bachelor’s degree holders, the bargaining strength of these
individuals will decline, leading to lower wages. Data was collected from through a government
agency called the American Community Survey. Data was analyzed using Stata statistical
software. Graphical representations with built in regression models were used to accurately model
the data. The data collected and analyzed for this study aim to answer these three major research
questions: Have middle skill workers slowly waned into a low socioeconomic class? Is the
bargaining power of workers diminishing, as the number of workers with the same skill set
increases? Is the effect of bargaining power a significant impact on this socioeconomic trend?
Analysis done on these three questions opens up for discussion if the government should expand
its role in wage distribution.
Keywords: wage inequality, education, job polarization, bargaining power
1. Introduction
In the late 1900s, more specifically the 1960-80s(University of California at Santa Cruz), the
United States of America saw a drastic drop in the number of Unions representing the labor force.
In correlation with this dramatic change has been a similar trend in the change in the real wage
gap, between Chief Executive Officer’s (CEO) and unskilled workers. This time period signifies
a dramatic increase in the socio-economic gap between the upper elite and the lower and middle
classes. According to The Washington Post U.S citizens believed that CEOs made about 30 times
as much as their unskilled workers. In actuality CEO’s make more than 350’s times the amount of
money their average workers make (Washington Post).
More interesting perhaps is the shift from industry jobs to service jobs. It is proposed by Ethan
Kaplan, PhD that following this shift there was also a change in wage inequality. He hypothesizes

2. more highly skilled workers (i.e. businessman) were then able to compete for low skill jobs (i.e.
Starbucks). It is possible that the increase in the amount of people searching for low skill jobs
during a recession, has drawn down the wage of low skill jobs. This is because about 40-50 years
ago a highly skilled worker wouldn’t want to work a factory job, and the factory probably wouldn’t
want a highly skilled worker. There are a couple of reasons for this: (a) Highly skilled workers are
more likely to form unions. (b) Highly skilled workers aren’t necessarily better at completing these
jobs then low skilled workers. As a result highly skilled workers during recessions only sought
after highly skilled jobs.
This paper is an explanatory study that employs the Bargaining Theory of Wage. It is
hypothesized that the transition to a service-based economy, allowed highly skilled workers to
attain low skill jobs. Wages have dropped because the labor supply has increased for these jobs.
As a result those in low skill jobs have an incentive to achieve higher levels of education to attain
a wider variety of jobs (as low skill jobs aren’t exclusive anymore). This theory explains why
middle skilled workers real wages have been decreasing overtime, while highly skilled workers
have seen an increase in real wage (David Autor). The Bargaining Theory of wages states, there
is no single economic principle or governing wages. Instead, wages and other working conditions
are determined by workers, employers, and unions, who determine these conditions by negotiation.
This paper will cover the time frame from the great recession onwards. The salary information
of employees will be cross referenced using this data. The wage between different occupations
with be compared to themselves over an eight year time period. As well as the amount of education
each individual had for those particular occupations within the same time frame. Following this
initial analysis, this paper will identify how wage disparities have grown in the different sampled
occupations across the eight year time period 2005-2013. It is important to follow this strict
timeline and conditions to gain a sincere understanding how middle skilled worker occupations
wage has changed overtime, compared to highly skilled occupations during recessional periods.
For that purpose this paper collects data prior, during, and following the Great Recession. If it is
found that as the number of middle skilled workers increased accompanied with a decrease in their
wages then a follow up question must be asked. The question is, what role should the federal
government have in moderating the wage of middle skilled workers? In addition the cross
comparison of these timelines and conditions will help paint a clear picture of what determines
socioeconomic statuses. The research questions asked in this paper are what has caused the
disappearance of the middle class, and is part of its disappearance due to lack of bargaining
power(if so what effect did unions have). The answers to these questions will add to the wealth of
knowledge concerning the disappearance of the middle class.
2. Literature Review
The wage gap between highly skilled workers and middle skilled workers has continued to grow
since the 1970’s. Unlike prior time periods during the 1970’s- late 1980’s the accumulation of
college degrees, did not keep up with the rising demand of highly skilled laborers. This has helped
shaped the current income to job distribution in America today. A precedent has been set for a
continuing rise in the real wage of highly skilled workers. However, accompanying this
phenomenon has been a decrease in the real wage of unskilled workers (David Autor). It is unclear
how much of an effect unions have on the wage of middle skilled workers. There is a vast amount
of literature covering my specific topic. This paper will follow a diachronic approach.

3. “National Union Effectiveness in Organizing: Measures and Influences” (1995) by Jack Fiorito,
Paul Jarley, and John Thomas Delaney. Their research offered an important aspect of information
regarding what impacts the effectiveness of Unions ability to organize (which they correlated to
union effectiveness). The major factors they found were environmental and organizational
influences. The end result of their research supported the claim that internal union democracy has
some impact on union effectiveness.
Trends in U.S. Wage Inequality: Revising the Revisionist (2008) by David H. Autor, Lawrence
F. Katz, and Melissa S. Kearney, studies what factors impacting wage inequality in the United
States. They reached two conclusions “First, much of the rise in U.S. earnings inequality during
the 1980s appears to be explained by shifts in the supply of and demand for skills combined with
the erosion of labor market institutions—including labor unions and the minimum wage—that
protected the earnings of low- and middle-wage workers.2 Second, a number of influential studies
argue that the surge of inequality evident in the 1980s reflected an ongoing, secular rise in the
demand for skill that commenced decades earlier and perhaps accelerated during the 1980s with
the onset of the computer revolution. When this secular demand shift met with an abrupt slowdown
in the growth of the relative supply of college-equivalent workers during the 1980s—itself a
consequence of slowing educational attainment for cohorts born after 1949 and of smaller entering
labor force cohorts—wage differentials expanded rapidly”
“The Race Between Education and Technology”(2009) by Claudia Goldin and Lawrence F.Katz,
states that “educational wage differentials increased significantly in the 1980s, with a modest
advance in the 1990s. At the end of the twentieth century educational wage differentials remained
quite high, although at the start of the period they were higher still.”
“Polarization of Job Opportunities in the U.S Labor Market: Implications for Employment and
Earnings” 2010 by David Autor describes the growing wage inequality phenomenon. David Autor
found that “since the late 1970s and early 1980s, the rise in U.S. education levels has not kept up
with the rising demand for skilled workers”. David Autor also emphasizes the changing dynamic
of job opportunities in America. This was inevitably considered a factor in the current inequality
phenomenon.
In 2012, Mary C. Daly, Bart Hobijn, Ay¸segül ¸Sahin, and Robert G. Valletta published, “A
Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?”.
Their work has added to the wealth of knowledge about labor markets, adding to our understanding
of structural (otherwise known as natural) unemployment; their estimates suggested that the
natural rate of unemployment had risen from its pre-recession level, by approximately 6 percent.
Their findings prove that more research should be done on the forms of unemployment, as they
may be the key to solving the inequality crisis.
Jared Bernstein and Dean Baker authored “Getting Back to Full Employment” (2013). The
authors discuss structural and frictional unemployment. The reading states that high
unemployment can be better handled by the Federal Reserve, if their policies didn’t primarily focus
on keeping the interest rates low. Unfortunately an overwhelming majority of those unemployed
are African Americans, people with lower levels of education, and those who receive low levels
of income.
Nir Jaimovich and Henry E. Siu of the NBR in 2014 authored, “The Trend is the Cycle: Job
Polarization and Jobless Recoveries”. In this paper the two looked into what types of occupations
are affected most by recessions and how they recover. They categorized occupations into either
routine or non-routine, and manual or cognitive (see paper for working descriptions of each). It
was their finding that, ”…job losses in routine occupations (that account for a substantial fraction

4. of total employment), and that jobless recoveries are observed only in these disappearing jobs since
polarization began.”
“Polanyi’s Paradox and the Shape of Employment Growth”(2014) by David Autor, focuses on
the effects a switch from industrial occupations to technical ones had on levels of employment. In
fact, it states that the industrial revolution was exceedingly impactful on employment. It made
skills needed for once highly demanded jobs (i.e. blacksmith, stable hands, etc.) obsolete He then
explores the effects polarization of occupations may have on wages.
“Wage Inequality: A Story of Policy Choices” (2014) by Lawrence Mishel, John Schmitt, and
Heidi Shierholz investigates the effect of economic policy on unemployment. This paper suggest
that the bargaining power of middle skilled and low skilled workers has been decreasing over time.
The authors highlight that de-unionization can account for about 33% of the growing wage
inequality we have today.
“Upskilling: Do Employers Demand Greater Skill When Workers are Plentiful?”(2015) by Alicia
Sasser Modestino, Daniel Shoag, and Joshua Balance, investigate the effect of an abundance of
workers on skill levels demanded. This paper suggest that proceeding the Great Recession skill
levels demanded increased for low and middle skilled jobs. Further the research suggest that in
bad labor markets education and experience demand increases.
The literature offers a particularly strong analysis of wage inequality from a variety of
perspectives. A few conclusions drawn from previous research are the effects technological
advancements have on wage inequality, possible changes in structural employment cycles,
international trade and immigration, and the effects declining union representation has on
employee wages. An interesting perspective that hasn’t been touched on in any of the articles I
have read is what affect the economic shifts has on the effects of wage inequality, and it’s
implications during recessional periods.
3. Theoretical Framework and Research Methodology
This research is predicated on the use of two theories. The first theory by Dr. Ethan Kaplan grounds
the research. His theory essentially states that the transition from an industrial economy to a service
based economy, had dramatic effects on wage inequality dynamics. The transition to a service
based economy allows highly skilled workers to apply for, and obtain low skilled occupations.
This has effectively lowered the wage for these low and middle class occupations. The second
theory is the Bargaining Theory of Wages, which is the backbone of this study because allows the
analysis of middle skilled workers ability to negotiate wages. The theory asserts “that wages,
hours, and working conditions are determined by the relative bargaining strength of the parties to
the agreement” (Britannica).
The theory explains why middle skilled workers wages have not been increasing, as fast as their
highly skilled counterparts. Analysis will show if a lack of bargaining power has contributed to
the middle class declining into the lower class. The theory is useful to properly analyze the increase
of wages of the upper class (generally highly skilled), diminishment of the middle-class (generally
middle skilled), and the increasing size of the lower class (generally low skill/unskilled). Although
the number of lower class workers is increasing, the real wage of this skill level is dropping (David
Autor). The Bargaining Theory of Wages helps to explain why this is the case, and how middle
skilled workers can maintain middle skilled income.

5. The hypothesis tested is that if over time (because of the rise of the technical age) available jobs
moved to more highly skilled technical sectors and the number of people holding bachelor’s
degrees went up, the relative bargaining power of these middle skilled Americans has dwindled.
If the hypothesis proves to be true, it is expected that more bachelor degree holders will be moved
to the lower class. This is because their bargaining power would have naturally mitigated as
technology progressed.
The research design uses a quantitative methodology; identifying the growth of middle class
wages as its unit of analysis. As such an aggregate (macro) approach is used to investigate its
growth comparatively to high wage occupations. Data was acquired through a government agency.
This Agency is the American Community Survey (ACS). It is a household survey that collects data
from a random sample of approximately three million Americans, from all 50 states. The large
sample size makes this data ideal for drawing conclusions and deriving implications. Occupation,
wage, and education data are the meaningful variables extrapolated from the ACS data set. This
approach uses purely numerical research. Given the nature of the research a quantitative
methodology, provides the most effective perspective for analyzing middle skilled workers and
their respective socio-economic class.
4. Data Analysis
Stata statistical software was used to analyze the data provided by American Community Survey
(ACS). Stata is a prominent statistical software among economist. It allows for various statistical
procedures to be applied to a large data set (or sets simultaneously). The significance and ease of
use made Stata the ideal software for research on unemployment and wage inequality, following
the Great Recession. It employs various statistical procedures that can account for variability in
data and outliers. In this study Stata was used to make graphical representations, of wage vs. years
of education, growth of wage inequality, and weighted linear regressions of the two. Further
analysis of the data was done through the application of a weighted ordinary least squares test.
The combination of these graphs, accurately depicts the relationship between unemployment and
wage inequality.
4.1 Graphical Representations of Data
Graphs suggest that low skilled occupations saw a prominent (1.5-2%) increase in educational
attainment then those in high skilled occupations (see figure 2). The increased can be explained by
the movement of highly skilled workers into low skilled jobs. As predicted by the grounding
theory. Although data wasn’t collected as a longitudinal survey, cultural attitudes towards
education (due to world labor market competition among others) support the results. Graphical
representations of wage growth compared to education growth show an interesting phenomenon.

6. The weighted scatter plots created from the ACS data set supported the hypothesis, that the
transition from an industrial economy to a service based one, affected the distribution of wages
across occupations. Most notably through its effect on wage growth. Now laid off highly skilled
workers could obtain low skill service based jobs during recessions. This shift is unprecedented in
American History, previously highly skilled workers would not be selected to work low skill
occupations. Because of this shift wages for low skilled occupations has increased at a slower rate
than for high skilled occupations. Data suggest that low skill occupations have seen a more
prominently increasing amount of education compared to those in high skill occupations. This
Figure 1
Wage Growth(06-
13) Vs.Occupation
Log Wage (05)
Figure 2
EducationGrowth
(06-13) Vs.
OccupationLog
Wage (05)

7. suggest that during recessions highly skilled workers were able to search for, out compete low
skilled workers, and obtain these low skill jobs.
5. Conclusion
The study suggest that the Bargaining Power of low and middle skilled workers has effectively
been decreasing overtime. Most prominently during recessional periods, where highly skilled
workers are applying for low skilled jobs. The effects of this are decreased wages, and wage growth
for low skill occupations. This data analyzed under the Bargaining Theory of Wages is consistent
with the results expected from the Dr. Ethan Kaplan’s theory. This verifies the conclusions drawn
through the grounding theory.
Further the purpose of this study has been fulfilled. The causal link between the economic shifts
from a manufacturing economy to a service based one and wage inequality has been determined.
It was also found that there is a weak positive correlation between wage growth and occupational
wage. This result is an interesting result. As seen in figure 1 rightward distance on the x axis
corresponded to high paying jobs (equating to highly skilled workers). This observation suggest
that during recessional periods low skilled workers are worse of then highly skilled workers, in
terms of wage growth. This depiction explains how and why wage inequality has been increasing,
as it relates to the economic shift previously discussed.
To form unity in the research proposed, Thiel’s Index will be used to analyze income inequality
across all 50 states in America. This research will prove useful, in identifying whether economic
policy is accommodating those with high socioeconomic status, and whether it is adequately
addressing the issues of wage inequality. Once this information is gathered the resources needed
will be available to allow policy makers, to make informed decisions to tackle wage inequality.
6. References
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inequality: Revising the revisionists." The Review of Economics and Statistics 90.2
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4. Baker, Dean, and Jared Bernstein. "Getting Back to Full Employment." Center for
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