The Wage Structure

1
The Wage Structure
2
Introduction and Overview

• Explain the positive skew in earnings
  distribution.
• Understand wage inequality in the United States.
• The facts patterns and trends in the data.
• The explanations factors that have led to
  increased inequality.

3
Basic Shape of the Wage Distribution
Frequency

• Positively skewed

Wage
Human capital theory can explain the shape of
this distribution.
4
Distribution of Ability
Worried? http//www.iqtest.com/
5
Human Capital Theory

• Individuals with the highest ability have the
  greatest incentive to invest.
• This stretches out the earnings distribution at
  the top end.

6
Measuring Inequality

• The spread between wages at different percentiles
  of wage distribution is a measure of wage
  dispersion.

Density
Density
Wage below which 90 of population earns
Wage below which 10 of population earns
7
Measuring Inequality

• Percent change in wages from 1963 to 1995
• Why does this equal the percentage change in
  average wages?
• lnw95/w63
• lnw95/w63-w63/w631
• Recall that ln(x1)x when x is small. Thus,
• Can look at changes at different points in the
  earnings distribution.
• For example One can examine the percentage
  change in wages at the 10th, 50th and 90th
  percentile of the wage distribution.

8
Percent Change in Weekly Wage by Percentile,
1963-1995
9
Percent Change in Weekly Wage by Percentile,
1963-1995
10
Timing of Increasing Inequality
11
International Comparisons
12
Explaining Increased Inequality

• In theory two possible reasons
• Increases in the dispersion of skills.
• Increase in the returns to skills.
• Note Some skills are observable to researchers
  (education, experience), others are unobservable
  to researchers (motivation, charisma).
• We will start by looking at changes in the
  returns to observable skill . . .

13
Trend in Educational Wage Gap
14
Wage Growth by Demographic Group, 1963-1995
15
Changes in the Returns to Experience
16
What are residual wages?
Regression Line Slopeß
Log Wage

wage residual (u)

a
Education (X)
17
Increasing Residual Wage Dispersion
Log Wage
Log Wage

Education
Education
Over time, we have seen increasing residual wage
dispersion.
18
Changes in Residual Wage Gap
Residual Wage wage after controlling for age,
education, experience and region of residence.
19
Where Have Changes Occurred?

• Observable skill quantities (Xieducation,
  experience)
• Increasing spread in educational attainment
• Increasing spread in experience
• Returns to observable skill (ß)
• Returns to unobservable skill (ui)
•  
•  Percentage Change in the 90th-10th Wage
  Differential

Juhn, Murphy, Pierce 1993
20
Why Did Wage Inequality Increase?

• Demand-side factors
• Supply-side factors
• Institutional factors 

21
Demand-Side Factors
Relative Wage Of Skilled Workers
S

• Major Demand Factors
• Skill-Biased Technological Change
• Globalization and Trade
• Imports hurt less-skilled
• Exports benefit more-skilled

w1
w0
D1
D0
Relative Employment Of Skilled Workers
e0
22
Supply-Side Factors
Relative Wage Of Skilled Workers
S0
S1

• Major Supply Factors
• Cohort size (i.e. the Baby Boomers)
• Female Labor Force Participation
• International Immigration
• Influx of low-skilled immigrants in the 1980s but
  not big enough to cause relative supply of
  skilled workers to fall.

w0
w1
D0
Relative Employment Of Skilled Workers
e0
23
Shifts in Supply and Demand
Relative Wage Of Skilled Workers
S0
S1
Demand shifts must outweigh supply shifts
w
w0
D1
D0
Relative Employment Of Skilled Workers
e
e0
24
Institutional FactorsIndustry Wage Differentials

• Fact Workers in some industries earn more than
  workers in other industries.
• True even after controlling for observable worker
  differences.
• During the 1980s
• The proportion of less-educated workers in
  low-paying industries
• The proportion of highly-educated workers in
  high-paying industries
• Also, industry wage differentials
• This might explain part of the reason why the
  returns to education appears to have increased.

25
Institutional Factors Decreases in Unionization

• Fact Unions tend to increase wages by as much
  as 15.
• Union membership for men 1973-74 30.8
• Union membership for men 1993 18.7
• Changes by Education
• Less educated men
• College graduates increased slightly.
• Thus, the decline in unionization for workers
  with less education may also explain part of the
  increase in the returns to education.

26
Institutional FactorsDecline in the Real Value
of the Minimum Wage

• Real value of minimum wage has eroded over time.
• Less-educated workers most often earn minimum
  wage
• Could explain drop in wages of less educated
  relative to wages of more educated.