Goldin and Katz: Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing

This paper by Claudia Goldin and Lawrence F. Katz documents the sources of the growing disparity in economic outcomes in recent decades. They find that "the majority of the increase in wage inequality since 1980 has come from rising educational wage differentials, particularly rising returns to post-secondary schooling." But the reason is interesting. They find it's not because of an increase in the growth of demand for skilled workers, i.e. from an increase in demand driven by skill-based technical change. Instead, "the growth of the supply of skills slowed considerably after 1980 and the wage structure, in consequence, widened. The slowdown in the relative supply of skills of the working population came about largely from the slowdown in the growth in the educational attainment of U.S. natives for cohorts born since around 1950."

This is the introduction and (part of) the conclusion to the paper:

Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing, Claudia Goldin and Lawrence F. Katz, September 2007: From the close of World War II to 1970 ... America enjoyed widespread prosperity. Not only did the nation grow rapidly, all parts of the income distribution expanded at fairly similar rates. America was “growing together.” But in the mid-1970s, economic growth slowed. By the early 1980s the wage structure began a period of widening that has lasted until the present day. Even though productivity growth surged again starting in the mid-1990s, the benefits of economic growth have been concentrated at the top end of the distribution.[1] America has been “growing apart.”

Click on figure to enlarge

The “growing together” and “growing apart” patterns are shown in Figure 1, which compares real income growth across the family income distribution for the postwar period before and after 1973. For the pre-1973 period, real income growth was fastest near the bottom of the income distribution and slowest near the top, making the changes modestly equalizing. In sharp contrast, for 1973 to 2005 family incomes virtually stagnated for the lowest quintile but grew more than three times as rapidly for the top 5 percent as for the middle group.

Since most Americans make their living from work, it should not come as a surprise that changes in the labor market and the distribution of wages have been the driving force behind the rising disparity in the economic fortunes of American families.[2] We document the nature of rising U.S. wage inequality since 1980 and place the recent changes into a century-long historical perspective to understand the sources of change.

The widening of the wage structure that began in the early 1980s differed markedly from the wage structure changes of the early- to mid-twentieth century. Rather than expanding during the previous decades, the wage structure narrowed substantially during the first half of the twentieth century and was relatively stable during the 1950s and 1960s. The spreading out of the wage structure since 1980 occurred in two stages. From 1980 to around 1987, wage inequality increased in a rapid and monotonic fashion. The top grew most rapidly, the middle less rapidly, and the bottom the least of all. Since the late 1980s the upper-end of the wage distribution has continued to grow rapidly relative to the middle, but the lower part has not lost out relative to the middle. These recent wage structure changes have been associated with a “polarization” of the U.S. labor market with employment shifting into high-and low-wage jobs at the expense of middle-wage positions.[3] Another key point we will make is that the majority of the increase in wage inequality since 1980 has come from rising educational wage differentials, particularly rising returns to post-secondary schooling.

Why has the wage structure widened so much since 1980? A popular explanation attributes the primary role to an increase in the rate of growth of the relative demand for more skilled workers from skill-biased technological changes and a re-organization of work driven by the spread of computer-based technologies.[4] Globalization pressures, eroding labor market institutions, and changes in the social norms that constrain pay disparities have also been offered as explanations and each appears to have played some role.[5] Our focus is on re-assessing the skill-biased technological change hypothesis in a long-run historical context.

Skill-biased technological change is not a new phenomenon. Rather, it has driven rapid secular growth in the relative demand for more-educated workers for at least a century. During most of the twentieth century the narrowing of the wage structure came about largely because the supply of skills grew faster than did the demand for skills. Growth in the relative demand for skills was produced largely by skill-biased technological change. Skill supply growth was due primarily to the rising educational attainment of successive cohorts. That, in turn, was fueled by increased access to public high schools and later to colleges and universities. The upshot of these changes was that the wage structure and educational wage differentials narrowed from 1915 to 1980, especially from 1915 to 1950.

Relative demand shifts favoring more-educated workers have not been particularly rapid since 1980. Instead, the growth of the supply of skills slowed considerably after 1980 and the wage structure, in consequence, widened. The slowdown in the relative supply of skills of the working population came about largely from the slowdown in the growth in the educational attainment of U.S. natives for cohorts born since around 1950. In contrast, the increase in unskilled immigration accounts for only a small part of the slowdown skill supply growth.

Although the overall rate of relative demand shifts for more-skilled workers does not appear to have accelerated since 1980, computerization and international trade and offshoring have changed the nature of demand shifts. Skill-biased technological change has increased the relative demand for skill in a rather monotonic manner across most of the past century. But computerization, a recent form of skill-biased technological change, has increased the relative demand for skill in a non-monotonic manner. Computers strongly complement the non-routine or abstract tasks of high-wage jobs, but they directly substitute for the routine tasks in many traditional middle-wage jobs. However, computers have little impact on the non-routine manual tasks of many low-wage service jobs. Furthermore, this pattern of demand shifts appears to have been reinforced by international offshoring. The consequence of these changes is a polarization of labor demand that has led to rapidly growing inequality in top half of distribution with little or no change in inequality in the bottom half of the distribution.

IV. Conclusions ...The economic returns to completing high school today appear substantial and the economic benefits to college and post-college schooling are at historically high levels. But the educational attainment of American youth is not rising as rapidly as it did over much of the twentieth century. Although college enrollment rates among new high school graduates have been rising since the early 1980s in response to high college returns, the traditionally-measured U.S. high school graduation rate (not including GEDs) has been stagnant for three decades and the share of young adults completing four-year college degrees has risen only modestly for post-1950 birth cohorts (especially for males).[43] After leading the world in education for most of the twentieth century, U.S. young adults are now in the middle of the pack in the OECD in terms of education attainment.[44] Expanding the educational attainment of U.S youth requires increasing the college readiness of children from poor and disadvantaged backgrounds and assuring the financial access to higher education of the college ready.[45]

The polarization of the U.S. wage structure since the late 1980s has been accompanied by a polarization of employment growth. U.S. employment has bifurcated into high-wage and low-wage jobs at the expense of traditional middle class jobs. Changes in task demand from the adoption of computer-based technologies have been a major source of this shift in the pattern of skill demands. The growth of international offshoring is likely to have reinforced these changes in skill demands. A key uncertainty with respect to future U.S. wage structure developments concerns the longer run impacts on skill demands and worker bargaining power from increased international economic integration and greater offshoring opportunities. Top-end knowledge jobs are likely to benefit from growing international markets and foreign offshoring is unlikely to be able to substitute for in-person services and for construction jobs.[46] The returns to abstract skills from college and post-college training are likely to remain high and demands are likely to grow for interpersonal (soft) skills found in in-person services. Our education system will need to be better positioned to produce individuals with abstract and interpersonal skills. A complementary approach would be to try “professionalize” the growing work force of in-person service workers and to develop labor market institutions to enhance the bargaining clout of such workers. Such policy changes are first steps toward shifting America from its current path of increasingly “growing apart” back to a trajectory of shared prosperity.