Some Notes on Residual Inequality

Abstract

Following empirical findings in the US wage distribution, a large debate spreads on the inequality issue. We will focus on the raise of the residual inequality, i.e. the one left unexplained by observable characteristics. In the literature, two main explanations are proposed, one based on technology, which relies on unobservable skills, in the context of Skill Biased Technical Change, and the other one based on a more standard labor economics approach that invokes a falling minimum wage effect. Although recognizing that these are important parts of the story, we will depart from both. Instead we will underline the pervasive role that institutions play in the work processes, both for the segmentation that takes place there and for the division of rents. We will stress the importance of the conflictual industrial relations in understanding the reorganization that occurred at the shop floor level from the late Seventies on, and the consequences on the wage distribution. We will present simple analytical tools that are helpful to address wage differentials, using an efficiency wage model. Finally, we will come back to US data (using March CPS) to test our theoretical predictions.