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Understanding Inequality & Wage Evolution in the US

Explore the evolution of inequality & wage premiums, market dynamics, and policy implications in the US labor market. Analyze the rise in wage inequality, factors influencing education premiums, and the impact of supply & demand on relative wages.

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Understanding Inequality & Wage Evolution in the US

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  1. The Evolution of Inequality and Relative Wages in the United States Kevin M. Murphy John von Neumann Lecture May 18, 2009

  2. Steps in the Analysis • Understand what has happened • Understand the marketplace • Draw implications for policy

  3. What has happened? • We will examine two aspects of the change in inequality • Changes in the returns to education • Changes in relative wages more generally

  4. Education

  5. Education Wage Premiums

  6. Education Premiums by Gender

  7. Education Premiums by Race

  8. Broader Changes in Relative Wages • General wage inequality has increased along with the education premium • We can track the growth in inequality by following wages at different “places” in the wage distribution • We will follow three types of workers: • Low wage workers = 10th percentile • Middle wage workers = 50th percentile • High wage workers = 90th percentile

  9. Overall Rise in Wage Inequality for Men

  10. Wage Growth by Percentile 1968-2004

  11. Wage Growth by Percentile 1968-1977

  12. Wage Growth by Percentile 1977-1986

  13. Wage Growth by Percentile 1986-1995

  14. Wage Growth by Percentile 1995-2004

  15. Bottom Line on Wage Changes • Inequality has increased greatly • Increases in inequality have been increasingly concentrated at the top of the distribution over the past 40 years • We see this with education where graduate premiums have continued to increase while college premiums have leveled off

  16. Why?

  17. Understanding the Market for Skill Supply & Demand

  18. Growth in Education Demand

  19. Demand Changes by Wage Percentile

  20. Supply & Demand • Growth in the college premium can be explained by a simple model • Model based on Katz-Murphy 1992 • The model: • Demand grows steadily over time • Fluctuations in supply cause education premiums to fluctuate • Supply grows faster than demand  premium falls • Demand grows faster than supply  premium rises

  21. Supply Growth & Relative Wages

  22. The Supply Response • Growth in the college premium has generated a predictable response – more people have gone on to college

  23. Wage Ratios & College Enrollment

  24. Summary of Data • Education & skill premiums have increased over time • The shift in demand has been increasingly concentrated at the top of the distribution in recent years • Growth in the demand for skill is the key • Equilibrium premiums reflect the combination of supply and demand • Supply responds to price

  25. Policy Implications

  26. Key Ingredients • The growth in wage inequality represents a demand-driven “price” change • Inequality and education premiums reflect a rising premium on skill • Higher returns to skill generate an incentive for more people to invest in schooling & other skills • More people going to school increases the supply of human capital

  27. Thinking More About Inequality • There are two sides to the growth in the price of skill • An increase in inequality – many regard this as bad • An increase in the return on human capital investment • Regardless of your view on the first it would be good to take advantage of the second

  28. The Positive Side • A greater return to human capital will increase the return to existing investments • A greater return to human capital will further increase growth by encouraging more investment in human capital • More investment will help reduce inequality through the effect of supply

  29. What should be the policy response? • The market response to a higher premium for skill has been and will be to increase the supply of skilled workers • Increases in the supply of skill will help check the growth in inequality • This “balancing” act between supply and demand has operated throughout the 20th century

  30. Important Issues • The growth in college graduates has lagged behind growth in the number going to college • May reflect the fact that many students are not well prepared for college • Long-run supply should be more elastic as more get prepared – but how much more? • The cost of poor preparation/schooling is higher than before  greater need to improve schools & young child preparation • Education has also become more important in other areas like health

  31. The Bottom Line • Think about growing inequality as a rise in the price of skill driven by increased skill demand = skill has become more valuable • The best response to more demand is to increase the quantity supplied • Other approaches to “addressing” the issue reduce our ability to take advantage of the higher return to human capital

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