Understanding recent changes in the wage structure.

• Author: Katz, Lawrence F.

Increases in family income inequality during the 1980s have received prominent media attention over the last year. Some of the media focus on this topic clearly reflects election-year politics. But popular interest in income distribution also reflects the concerns of many Americans that the economic expansion of the mid- to late 1980s failed to benefit a substantial fraction of American families by enough to offset the losses incurred during the recessions of the early 1980s. In fact, data from the Bureau of the Census indicate that the real money incomes of the bottom 40 percent of American families were essentially no higher in 1989 than the incomes of the bottom 40 percent of families a decade earlier. In contrast, the incomes of the upper 20 percent of families in 1989 were almost 20 percent higher than those of the analogous families in 1979.(1) The enormous disparities in the fortunes of American families in the 1980s largely have been associated with labor market changes that have increased overall wage inequality and altered the wage structure in favor of more-educated and more-skilled workers. Although the recent recession of the early 1990s may or may not be remembered as a white collar recession, the expansion of the 1980s was certainly a white collar expansion.

Understanding changes in family income inequality requires understanding changes in the wage structure. NBER economists have attempted to document and explain recent and historical changes in the U.S. wage structure. My remarks focus on the conclusions that can be drawn from this research concerning: 1) the dimensions of recent dramatic wage structure changes in the United States; 2) the likely causes of these changes; and 3) the extent to which similar changes are occurring in other advanced industrial nations.

A major cause of rising wage inequality and increased educational wage differentials since the 1970s is a strong secular shift in relative labor demand favoring more-educated workers and workers with problem-solving skills. This shift in labor demand is driven primarily by two forces: the increased internationalization of the U.S. economy, and skill-biased technological change, associated in part with the computer revolution. Similar changes in relative labor demand favoring more-educated workers appear to have occurred in other OECD countries. But not all OECD nations have experienced sharp increases in wage dispersion and educational wage premiums as the United States has. National differences in wage-setting institutions and in training and education systems appear to lead to quite different changes in wage structure in response to a similar set of market-driven shifts in demand.

Wage dispersion among both men and women increased substantially in the United States during the 1980s. The hourly earnings of the 90th percentile full-time worker relative to the 10th percentile full-time worker increased by approximately 20 percent for men and 25 percent for women from 1979 to 1989. Changes in the wage structure along three dimensions contributed to rising wage inequality. First, educational and occupational wage differentials expanded with a particularly sharp rise in the relative earnings of college graduates. The college wage premium doubled for young workers, with the weekly wages of young male college graduates increasing by approximately 30 percent relative to those of young males with 12 or fewer years of schooling. Second, the average wages of older workers increased relative to those of younger workers for those without college degrees. Third, wage dispersion increased greatly within narrowly defined demographic and skill groups. In other words, wage dispersion expanded among individuals of the same age, education, and sex, and it expanded among those working in the same industries and occupations. Much of this within-group increase in wage dispersion involved increases in wage differentials for "similar" work across establishments in the same industry. Both the identity of one's employer and one's formal educational qualifications matter more for one's earnings today than in the past. In fact, wage dispersion for males was greater at the end of the 1980s than at any time since 1940.

Since these wage structure changes occurred in a period of stagnation in overall real wage growth, the less-educated and the less-fortunate suffered substantial losses in real earnings relative to analogous individuals a decade earlier. The real hourly wages of young males with 12 or fewer years of schooling dropped by approximately 20 percent from 1979 to 1989. Finally, the one aspect of the wage structure that narrowed substantially during the 1980s was the gender gap, with the earnings of women increasing (typically by 10 percent or more) relative to men in all education and age groups from 1979 to 1989.

Although there is some disagreement about the causes of these wage structure changes, there is a broad consensus that wage inequality and "skill" differentials have increased sharply since the 1970s.(2) These facts have been documented and replicated by many researchers using many alternative data sources. Figure 1 provides a longer-term perspective on changes in the wage structure using data on relative hourly wages for full-time workers from the March Current Population Surveys. The key changes in...