Sources of earnings inequality: Estimates from an on-the-job search model of the US labor market

Since the early 1980s the labor market in the United States has seen a substantial increase in earnings dispersion. We study the issue by developing an on-the-job search model of the US labor market that allows for wage and employment mobility as a result of optimal individual behavior. We estimate its structural parameters on PSID data at different points in time to clarify the sources of the evolution of earnings inequality and instability between 1987 and 1996. This procedure allows to: compute lifetime measure of inequality on top of the usual cross-sectional measure of inequality and provide counterfactual experiments that evaluate the contribution of different parameters to changes over time by taking into account some equilibrium effects. We find that the increase in lifetime inequality and in cross-sectional inequality have been generated by different sources and that these sources are different by skills: changes in the wage offer distribution are the main determinant of the increase in inequality for skilled workers while both mobility changes and wage offer distribution changes are needed to explain changes for the unskilled.     

INEQUALITY OF WAGE RATES,EARNINGS AND FAMILY INCOME IN THE UNITED STATES, 1975–2002

This paper analyzes distributional changes over the last quarter of the twentieth century. We focus on four distinct distributions: the distribution of hourly wage rates, the distribution of annual earnings of individuals, the distribution of annual earnings of families, and the distribution of total family income adjusted for family size. Both male wage rate inequality and family income inequality accelerated during the early 1980s, increased at a slower rate through the early 1990s and then stabilized at a high level through the early 2000s. The similarity in the timing of changes in these two distributions has been used as evidence that increased family income inequality primarily reflects increased inequality of wage rates. We show that other important factors were also at work.     

Educational Attainment and the Gender Wage Gap: A Comparison of Young Men and Women in 1984 and 2007

This study pools data from two sources to investigate the role of educational attainment in determining the gender wage gap. The empirical analysis reveals that the returns to education remained largely unchanged for young men but declined significantly for young women over the period 1984–2007. We find significant evidence of a decline in the returns to a Bachelor's degree for young women as well as evidence of increasing wage inequality over time among young men and women with a Bachelor's degree. Also, in 2007, the gender wage gap between young men and women was largest for those with a Bachelor's degree. Further, our analysis suggests that young women with a college education may confront more discrimination in the labor market than young women without a college education. We conclude that promoting educational attainment among young women may be a necessary but not sufficient condition for addressing the gender wage gap.     

Wage Inequality and Wage Mobility in Europe

Using data from the European Union Statistics on Income and Living Conditions, this paper investigates wage inequality and wage mobility in Europe. Decomposing inequality into within‐ and between‐group inequality, we analyze to what extent wage inequality and mobility can be explained by observable characteristics. Furthermore, we investigate which individual and household characteristics determine transitions within the wage distribution. We find that overall, mobility reduces wage inequality. While a large part of wage inequality is due to unobservable characteristics, the equalizing effect of mobility mainly occurs within groups. Furthermore, both personal and household characteristics play an important role for wage transitions. Finally, our findings reveal large cross‐country differences across Europe.     

SHORT- AND LONG-RUN DECOMPOSITIONS OF UK WAGE INEQUALITY CHANGES

This paper focuses on the decomposition of observed increases in UK wage inequality since 1979 into the component factors of competition from low‐wage imports and technological change. Building on recent work by Abrego and Whalley, we argue that the length of production run and degree of fixity of factors is crucial in such analyses. If the response of labour markets to date is a short‐run response, in which factors and output have not adjusted fully, then analysis of the causes of increased inequality is substantially altered relative to a long‐run factors mobile world.     

TRADE AND WAGE INEQUALITY: THE HONG KONG CASE

Abstract. This paper examines the effects of Hong Kong–mainland China trade on the wage inequality in Hong Kong. Because of the large volume of trade and the large income disparity between these two regions, this empirical study provides a good test of the theories on North–South trade. The econometric analyses show that the relative wage between the skilled and unskilled workers in Hong Kong increased as the share of the volume of Hong Kong's trade with mainland China in Hong Kong's total trade volume rose.     

Inequality and mobility

Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this paper presents a model in which both are jointly determined. The model enables us to study how inequality and mobility are affected by exogenous changes and what determines their correlation. A main implication of the model is that differences in the amount of public subsidies to education and educational quality produce cross-country patterns with a negative correlation between inequality and mobility. Differences in the labor market, like differences in skill-biased technology or wage compression instead produce a positive correlation. The predictions of the model are found to be consistent with various empirical observations on mobility and inequality.     

SKILL REQUIREMENTS,SEARCH FRICTIONS,AND WAGE INEQUALITY*

We analyze wage inequality, extending the Burdett and Mortensen (International Economic Review 39 (1998), 257–73) model by incorporating worker heterogeneity through skill requirements. We provide sufficient conditions for existence of an equilibrium where more productive firms offer higher wages. The unique such equilibrium is characterized in a closed form solution. Both within‐ and between‐group inequality are explicitly calculated. We then calibrate the model to explain the joint movement of both within‐ and between‐group inequality in the late 1980s and 1990s, an explanation that has been elusive in the literature so far.     

THE OPTIMAL MINIMUM WAGE FOR POVERTY MINIMIZATION

This paper characterizes the poverty minimizing minimum wage, and shows how it varies as productivity, inequality and market competitiveness change. We show that the optimal minimum wage is equal to the competitive wage only in special cases. In general, the former is higher than the latter. Thus, poverty minimization does not coincide with employment maximization. We also show that the optimal minimum wage always rises with productivity and, under certain conditions, falls with competitiveness and inequality. Furthermore, the higher the competitiveness and inequality, the more the optimal wage rises with productivity.     

市场竞争不完全与企业内部工资差距*——基于产品与劳动力市场融合视角的分析

理解工资差距的形成机制是在新时期破解发展不平衡不充分问题，进而实现共享发展的关键。本文从产品与劳动力市场竞争不完全相融合的视角，扩展了中国企业内部技能员工与非技能员工工资差距形成机制的研究，兼论消除竞争不完全的效率提高。基于中国企业数据并在统一的框架下构建市场竞争不完全的测算指标，本文发现：中国的市场化改革并不必然带来收入差距的扩大，不完全的市场化改革形成的产品与劳动力市场竞争不完全才是引发企业内部收入差距的重要原因。当存在市场竞争不完全时，企业会将产品市场势力扩展到劳动力市场，形成劳动力市场竞争不完全对工资差距的更大影响。这意味着单一的市场化改革不能有效缓解收入差距，只有产品与劳动力市场的同步改革才能达到最优的政策效果。中国的市场化改革可以在初次分配中通过发挥市场机制兼顾效率与公平。     

THE IMPACT OF PERSONALITY TRAITS ON WAGE GROWTH AND THE GENDER WAGE GAP

This paper considers the impact of personality traits on the change of the gender wage gap. Using data from the German Socioeconomic Panel (SOEP), we first explore how personality traits affect wage growth rates. Then, a decomposition analysis is performed to analyse the dynamic effects of personality traits on the change of the gender wage gap over time. Our empirical results indicate that gender differences in conscientiousness and emotional stability lead to a widening of the wage gap over time. By contrast, gender differences in extraversion lead to a narrowing of the wage gap over time.     

WAGE DIFFERENTIALS, DISCRIMINATION AND INEQUALITY: A CAUTIONARY NOTE ON THE JUHN, MURPHY AND PIERCE DECOMPOSITION METHOD

This paper shows how difficult it is to study the roles of discrimination and unobserved skills when studying changes in racial and gender wage gaps over time by examining merits and shortcomings of a popular decomposition method by Juhn, Murphy and Pierce (JMP). The JMP method shows that wage dispersion can offer a compelling explanation of the wage gap. However, JMP have to rely on a few strong assumptions in order to derive their decomposition equation, which introduces wage inequality as the price of unobserved skills (the standard deviation of the residuals) into their decomposition equation.     

Product variety,finite changes and wage inequality

This paper presents a model with product variety to examine the effects of emigration and capital mobility between the North and the South on production reorganization and two-sided wage inequality. We obtain conditions under which the production patterns in both North and South undergo ‘finite changes’. Overall, the production and trade patterns may be such that the South produces and exports a homogeneous good while the North, a commodity with varieties — the result driven not by technological changes, but by factor mobility. The results further suggest that the wage inequality rises in both countries in conformity with available empirical evidence.     

INTERNATIONAL COMPARISONS OF INTER-INDUSTRY WAGE DIFFERENTIALS

We use OECD data to examine inter-industry wage differentials (relative wages among industries) for 14 OECD countries over the period 1970–85. We find, first, that the industrial wage structures have shown remarkable stability over time in terms of rank order for all the countries in the sample. Second, despite their rank order stability, wage structures show a tendency to expand or contract. While the U.S. has shown increasing industry wage dispersion between 1970 and 1985, the pattern is very mixed for other countries. Unionization is a significant factor in explaining cross-country differences. Third, industry wage rankings show some evidence of becoming increasingly similar across nations over time, and this movement is associated with a convergence of per capita incomes. Fourth, industry wage differentials are positively related to an industry's productivity growth, output growth, capital intensity, and export orientation.     

WAGE DIFFERENTIALS AND OCCUPATIONAL WAGE PREMIA: FIRM-LEVEL EVIDENCE FOR BRAZIL AND CHILE

This paper examines wage differentials at the firm level in Chile and Brazil, using data for 1985 and 1991, and 1987 respectively. The high level of disaggregation in the data available for Chile enables us also to analyze the degree to which wage differentials between individual employers are similar across occupations.
The results of this study reaffirm those of previous research pointing to non-competitive explanations for wage differentials, specifically providing clear evidence that inter-firm wage premia are highly correlated across occupations.     

NEW EVIDENCE ON REAL WAGE CYCLICALITY WITHIN EMPLOYER–EMPLOYEE MATCHES

In the most thorough study to date on wage cyclicality among job stayers, Devereux's (2001) analysis of men in the Panel Study of Income Dynamics (PSID) produced two puzzling findings: (1) the real wages of salaried workers are noncyclical, and (2) wage cyclicality among hourly workers differs between two alternative wage measures. We examine these puzzles with additional evidence from other sources. Devereux's finding of noncyclical real wages among salaried job stayers is not replicated in the National Longitudinal Survey of Youth (NLSY) data. The NLSY data, however, do corroborate his finding of a discrepancy for hourly workers between the cyclicality of the two alternative wage measures. Evidence from the PSID Validation Study contradicts Devereux's conjecture that the discrepancy might be due to a procyclical bias from measurement error in average hourly earnings. Evidence from the Bureau of Labor Statistics establishment survey supports his hypothesis that overtime work accounts for part (but not all) of the discrepancy. We conclude that job stayers' real average hourly earnings are substantially procyclical and that an important portion of that procyclicality probably is due to compensation beyond base wages.     

Firms and wage inequality in Central and Eastern Europe

We use large linked employer-employee data to analyze wage inequality patterns in Central and Eastern European (CEE) countries between 2002 and 2014. We show that, unlike in many other advanced economies, wage inequality levels have decreased in almost all CEE countries. These reductions in wage inequality resulted from disproportionately large increases in wages at the bottom of the wage distribution, and from decreases in between-firm wage inequality. We further find that the declines in wage inequality were driven by large wage structure effects that compensated for changes in the composition of workers.     

MINIMUM WAGE EFFECTS ON PERMANENT VERSUS TEMPORARY MINIMUM WAGE EMPLOYMENT

We estimate the effect of minimum wages on employment using the Master Files of the Canadian Labour Force Survey over the recent period 1997–2008. Particular attention is paid to the differences between permanent and temporary minimum wage workers—an important distinction not made in the existing literature. Our estimates for permanent and temporary minimum wage workers combined are at the lower end of estimates based on Canadian studies estimated over earlier time periods, suggesting that the adverse employment effects are declining over time for reasons discussed. Importantly, the adverse employment effects are substantially larger for permanent compared to temporary minimum wage workers; in fact they fall almost exclusively on permanent minimum wage workers. (JEL J30)     

The diffusion of computers and the distribution of wages

When the costs are decreasing workers adopt technology at the point where the costs equal the increased productivity. Output per worker increases immediately, while productivity benefits increase only gradually if costs continue to fall. As a result, workers in computer-adopting labor market groups experience an immediate fall in wages due to increased supply. On the other hand, adopting workers experience wage increases with some delay. This model explains why increased computer use does not immediately lead to higher wage inequality. More specifically, the results of the model are shown to be consistent with the question why within-group wage inequality among skilled workers as a result of computer technology adoption in the United States increased in the 1970s, while between-group wage inequality and within-group wage inequality among the unskilled did not start to increase until the 1980s. The model also predicts that the more compressed German wage structure leads to a lagged diffusion of computer technology along with smaller changes in wage inequality. Our empirical analysis suggests that this is consistent with the actual developments in Germany since the 1980s. Finally, the theoretical predictions seem to be of the right magnitude to explain the empirical quantities observed in the data.     

COLLEGE MAJOR CHOICE AND CHANGES IN THE GENDER WAGE GAP

The distribution of college majors changed markedly between the 1970s and 1980s as fewer students completed degrees in low-skill fields such as education and letters and more graduated in high-skill fields such as engineering and business. This shift was most dramatic for females, who previously were concentrated in low-skill fields relative to those of males. This paper examines how this education-related skill upgrade, as represented by changes in the major distribution, affected the gender wage gap for college graduates during the 1980s. The results show that convergence in major distribution between males and females contributed to a decline in the gender wage gap for college graduates.