Class-Biased Institutional Change and Rising Wage Inequality

1. Class-Biased Institutional Change and Rising Wage Inequality Kim A. Weeden David B. Grusky RC28, Brno, 2007

2. Fig. 1: Rising wage inequality, 1973-2005 Men Women Variance ln(wages)

3. Standard explanation of take-off • Skill-biased technological change (SBTC) • Rising demand and increased productivity • Market assumption • Reaction to problems with SBTC account • Sniping is norm • Beyond sniping: Supplement SBTC account with complementary umbrella narrative that has reach of SBTC • Standing on the shoulders of giants: Parkin, Sørensen, DiPrete, Western, Morris, Picketty, and many more

4. Rent-based approach • Starting point: Extra-market institutions of rent extraction • Rents • Wages in excess of counterfactual wage under perfect market competition • Demand for labor cannot be met because of barriers to entry • Examples • Union wage premium • Minimum wage • Wage premium to occupational closure • Rent matters

5. Laws of motion of rent • Conventional view (e.g., Sørensen) • Rent destruction is global, inevitable • More inequality, but “structureless” • Class-biased institutional change (CBIC) • Rent destruction at bottom of class structure • Unions • Minimum wage • Rent creation at top of class structure • Successful occupational closure projects • Market expansion more likely for nonmanual workers • Asymmetry of rent creation and destruction is powerful force for inequality-generation • Why the asymmetry? Rent at top is better cloaked with efficiency story (as it’s only partly a “story”)

6. Rent creation • Diffusion of occupational “closure” • Licenses: Mandated by state • 10% (1970s) to 20% (2004) of labor force: More licensed workers than union workers • MN data: 47 closed occupations in 1968, approx. 160 in 2004 • Certifications: Voluntary credentials offered by associations also increasing (see Procertis) • Increasing use of educational credentials (e.g., MBA) • Expanding markets for services of closed occupations

7. CBIC account: Fractal change • Sectoral shift • Manual occupations (decline of unions, minimum wage) • Nonmanual occupations (specialized or abstract knowledge, market expansion) • Class shifts • Nonmanual sector winners: Managers (credentialing), sales (licensure and certification), professions (market expansion) • Manual sector losers (all classes but service) • Occupation shifts: “Matthew effect” in which occupations at top can more readily effect closure

8. Data • May/ORG CPS, 1973-2005 • Wage and salary workers • Unedited earnings • Topcode imputation • Weighted by hours usually worked • 1.8 million men, 1.6 million women • Approx. 500 occupations (indigenous SOC) • 10 classes: Featherman-Hauser scheme (prof., mgr., sales, clerical, craft, service, operative, labor, farm, farm labor) • 2 sectors (nonmanual, manual)

9. Analytic approach • First cut: Are structural inequalities growing (i.e., four-way decomposition of variance in (log) wages) • BS: Between sector (manual vs. nonmanual) • BC: Between big class • BO: Between occupation • WO: Within occupation • Second cut: Are patterns of change consistent with CBIC account? • Is manual-nonmanual divide growing? • Are big classes winning and losing as predicted? • Is between-occupation inequality growing as predicted? Structural inequality

10. Fig. 2: Decomposition of men’s total wage inequality Total Variance ln(wages) WO Struct. BS BO BC

11. Table 1: Estimated change in components of men’s wage inequality

12. Fig. 3: Decomposition of women’s wage inequality Total Variance ln(wages) WO Struct BS BO BC E

13. Table 2: Estimated change in components of women’s (total) wage inequality

14. Conservative test • Structural component is partly generated by education and experience differences • Example: When JD instituted as requirement for becoming a lawyer, two interpretations of resulting restriction on labor supply obtain • SBTC: New educational requirement reflects new skill requirements • CBIC: New educational requirement is imposed without precipitating changes in skill • Lower-bound estimate: How large are structural effects if education and experience are given over wholly to STBC? • Residual wage inequality (i.e., standard Mincerian wage regression) • Education (5 categories) • Potential experience quartic • Full interactions between education and experience

15. Table 3: Structural share of residual wage inequality

16. Fig. 4: Nonmanual sector: Men’s residual wages Mgr. Prof. Sales Smoothed Coefficient Clerical NOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition

17. Fig. 5: Nonmanual sector: Women’s residual wages Mgr. Prof. Smoothed Coefficient Sales Clerical NOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition

18. Fig. 6: Manual sector: Men’s residual wages Craft Smoothed Coefficient Oper. Labor Service NOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition

19. Fig. 4: Manual sector: Women’s residual wages Craft Oper. Smoothed Coefficient Labor Service NOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition

20. Summary of class-specific trends • Nonmanual sector • Managers and professionals pulling away (esp. after 1982) • Sales: Curvilinear trend explicable in rent terms • Clerical workers: Wage declines • Manual sector • Craft, operative, and labor wages declined (except that craft wages for women increased in 1970s) • Service class wages increased

21. Conclusions • CBIC account has potential (albeit evidence is just as indirect as that on behalf of SBTC) • Implications for future of inequality • Decline in inequality is not intrinsic effect of industrialization (e.g., Kuznets Curve) but historically contingent process • Rent-creation at top has more staying power • Culture: Cloaked with efficiency story • Power: Backed by powerful actors • A long run-up is plausible