Why is Wage Inequality so High in the United States? Pitching Cognitive Skills Against Institutions (Once Again)

Abstract

We revisit the relationship between cognitive skills and wage inequality and, contrary to most previous research, find that skills do play an important role in explaining differences in wage inequality between the United States and other OECD countries. We argue that previous research suffered from a number of methodological shortcomings, and we offer a single and unified analytical framework for analysing the contribution of skills (including demand and supply conditions) and labour market institutions to wage inequality. Our results suggest that higher skills inequality in the United States accounts for 15% of the difference in wage inequality with other countries, while differences in the demand for and supply of skills can explain just over a quarter. In comparison, higher minimum wages in other countries explain only 7% of the difference in wage inequality with the United States, while higher union coverage can explain 40%.