Wage Stucture: Facts Lent Term Lecture 1 Dr. Radha Iyengar

Administrative Details  2 hour lecture each week—Topics include both economic theory underpinnings and empirical applications  1 hour class—go over 1 paper to work on understanding concepts and interpreting empirical results

Topics to be covered  Wage Structure-Introduction to facts What are trends in earnings What are trends in earning inequality Which groups earn more?  This will provide us a framework to think about

Explanations for wage differences Why do earnings differ?  Production Technology/Industry Structure  Human Capital  Signaling Models  Specific Capital (On-the-job training)  Discrimination  Different Labor Markets (Illegal Labor Markets, Crime)

Today’s Class—Wage Structures  Talk more about the US but compare to Europe  Not much talk of developing economies— different issues but much of this can apply there  Discuss Facts today, Theories Next week

Inequality changes SHARP in US  Hourly and weekly earnings  Reinforced by including non-wage compensation  Looking at the very top - CEO.s, top 1, 5, 10 percent of earners reinforces this picture - and underscores the timing.  Mostly from wage residual: ε it = w it – βX it

Change in Log Real Weekly Wage (by percentile) Source: Autor and Katz (1999)

Trends in Inequality-US Source: Lee (1999)

Changes in US Inequality Source: Autor, Katz, Kearny (2005)

Big Changes in the last 50-Years  Wages have gone up on average  Wages have gone up much more at the top end of the income distribution  Real wages are falling at the low end of the distribution

Source: Juhn Murphy & Pierce(1993)

Comparing US to UK  wage growth was more pronounced at higher points of the distribution  in the 1980s the expanded by 1.9 percentage points a year in both countries.  An important difference: UK there was positive wage growth throughout the distribution in the US workers in the bottom quartile actually had zero or negative wage growth.

Inequality changes worldwide  Many places saw a rise in earnings differentials in the 1980s, but only in the UK was the rise as pronounced as in the U.S. Very large increases: US and UK Modest increases: Australia, Canada, Japan, Spain, and Sweden No noticeable changes: France, Germany and Italy Modest falls: Netherlands Large falls: South Korea

Total Factor Productivity  U.S., average and median wages stagnated after 1973 and fell considerably in absolute terms for low wage workers. This trend was reversed only after  Other OECD countries did not experience this pattern of declining absolute wages.  The stagnation in wages corresponds to a post-1973 decline in the growth of Total Factor Productivity that had risen rapidly during the post-War golden age.  This experience of sharply slowing TFP growth was shared in all developed economies. TFP began to rebound in the mid to late 1990s in the U.S.

Source: Gordon, JEP 2000

Supply of Skills  Remarkable growth in the supply of skills amongst all advanced economies.  Very large cross-country differences in the timing of acceleration and slowdown in production of skills  U.S. had particularly severe rise in 70s, fall in 80s due to Vietnam war. UK experienced the slowdown later. Netherlands and North Korea had extremely rapid supply growth during the 1980s, producing a rapid fall in earnings differentials.  Slowdown in UK and Canada came later and was not as severe in the 1980s  In the Netherlands and Korea, supply actually grew faster in the 1980s.and skill premia declined.

Changes in Returns to Education  Returns to education in the U.S. fell during the 1970s when there was a very sharp increase in the supply of educated workers.  Returns to education then began a sharp rise in the 1980s. This rise slowed in the late 1990s but never reverted.

College Wage Gap

Gender Wage Gap  The wage gap between males and females closed considerably.  This was particularly note- worthy given rapidly rising relative female labor supply since  Most other advanced economies also saw a declining gender gap in the 1980s, though the U.S. again stands apart in that the trend change was quite sudden after 1979.

Gender Wage Gap

What can reconcile all these facts?  Unobserved skills  within, between and total inequality residual inequality (within) is inequality among those with same education With a single ‘skill’, all 3 types should move together Can this be the explanation?  We don’t see between and within inequality moving at the same time  Is this because of cohort specific changes in linkage between observed and unobserved skills?

What else can reconcile these facts?  Different people going to college (more able)? We call this a “cohort effect” With two skill levels (H and L) and two cohorts (1 and 2) this starts to get a little complicated Juhn, Murphy and Pierce (1993) use a double difference approach to deal with this  (Why would that help?)  Inequality is not a cohort-speciÞc phenomenon. Rather, growth in overall and residual  Maybe a time effect, with the average change growing after   rule out an entire class of explanations for rising inequality based on changes in sorting/composition/cohort quality

To a theory of Skill Preimia What we know now: 1. The timing of the growth of residual and between group inequality is distinct, at least in the U.S. This suggests that we should not think of.the rise in inequality. as necessarily being a single phenomenon. 2. It was not primarily a cohort specific phenomenon, meaning that it is unlikely to be due to differences in sorting or skill composition by different cohorts of labor market entrants. Next week: a theory on pricing skills to motivate this!