Changes in the Inequality of Earnings for Young Men in Metropolitan Labor Markets, 1979–1989: The Effects of Declining Wages and Sectoral Shifts within an Efficiency Wage Framework

Abstract

Inequality in the earnings of young men with different educational backgrounds has grown rapidly in the United States in recent years, but the growth of inequality has varied widely across different metropolitan labor markets. We examine the increasing inequality of earnings among young men in the largest metropolitan areas of the United States for the 1979–1989 period and develop explanations for the growth of inequality that involve shifts of employment from highly paid to poorly paid sectors and declines in earnings within sectors. Our explanations depend on the logic of efficiency wage models. Efficiency wage models allow wages to include noncompetitive premiums that may differ across industries and regions because of differences in production conditions. This makes it possible for the real wages of identically qualified workers to differ across industries and regions, even at equilibrium. Shifts in the employment of less-educated young men from well-paid to poorly paid sectors (such as manufacturing to services) accounted for only minor portions of the growth of inequality. Most of the growth of inequality resulted from declining earnings within sectors, especially in those sectors and metropolitan areas where earnings for less-educated young men were highest in 1979, relative to the earnings of young men with more education. This pattern of earnings declining most rapidly in sectors and cities where they had been highest also accounts for much of the variation in the growth of inequality across metropolitan areas and is consistent with the demise of efficiency wage premiums that were previously available in particular industries and localities.