Increase In Wage Inequality Research Articles

Taxation of Human Capital and Wage Inequality: A Cross-Country Analysis

Wage inequality has been significantly higher in the United States than in continental European countries (CEU) since the 1970s. Moreover, this inequality gap has further widened during this period as the US has experienced a large increase in wage inequality, whereas the CEU has seen only modest changes. This paper studies the role of labor income tax policies for understanding these facts, focusing on male workers. We construct a life cycle model in which individuals decide each period whether to go to school, work, or stay non-employed. Individuals can accumulate skills either in school or while working. Wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks. Progressive taxation compresses the (after-tax) wage structure, thereby distorting the incentives to accumulate human capital, in turn reducing the cross-sectional dispersion of (before-tax) wages. Consistent with the model, we empirically document that countries with more progressive labor income tax schedules have (i) significantly lower before-tax wage inequality at different points in time and (ii) experienced a smaller rise in wage inequality since the early 1980s. We then study the calibrated model and find that these policies can account for half of the difference between the US and the CEU in overall wage inequality and 84% of the difference in inequality at the upper end (log 90-50 differential). In a two-country comparison between the US and Germany, the combination of skill-biased technical change and changing progressivity of tax schedules explains all the difference between the evolution of inequality in these two countries since the early 1980s.

Unequal we stand: An empirical analysis of economic inequality in the United States, 1967–2006

We conduct a systematic empirical study of cross-sectional inequality in the United States, integrating data from the Current Population Survey, the Panel Study of Income Dynamics, the Consumer Expenditure Survey, and the Survey of Consumer Finances. In order to understand how different dimensions of inequality are related via choices, markets, and institutions, we follow the mapping suggested by the household budget constraint from individual wages to individual earnings, to household earnings, to disposable income, and, ultimately, to consumption and wealth. We document a continuous and sizable increase in wage inequality over the sample period. Changes in the distribution of hours worked sharpen the rise in earnings inequality before 1982, but mitigate its increase thereafter. Taxes and transfers compress the level of income inequality, especially at the bottom of the distribution, but have little effect on the overall trend. Finally, access to financial markets has limited both the level and growth of consumption inequality.

Inequality and Poverty in China During Reform

This paper provides an overview of the evolution of income inequality and poverty in China from 1987 to 2002, documenting significant increases of inequality within China’s urban and rural populations. In rural areas, increased inequality is primarily related to the disequalizing role of non-agricultural self-employment income and the slow growth in agricultural income from the mid-1990s onward. Poverty persists, and tied in part to slow growth in agricultural commodity prices. In urban areas, the declining role of subsidies and entitlements, the increase in wage inequality, and the layoffs during restructuring have fueled the growth in inequality within urban areas. Poverty levels, however, are very low. China should give more emphasis on education, training, and other human development efforts in its poverty reduction strategy since return to education increased rapidly and became a major source of inequality. A nationwide social safety net and an effective redistributive taxation system should be adopted and implemented to ensure that the poor can benefit from the fruits of rapid economic growth.

The Race between Education and Technology: A Review Article

Though most who study inequality have come to understand that a nuanced and multifaceted story is needed to explain the experiences of the past 30 years, many economists take from the volumes of research on the subject that some combination of skill-biased technological change and changing institutions (e.g., erosion of the real value of the minimum wage, reduction in union membership, etc.) were the key explanatory factors. In their important new book The Race between Education and Technology (2008), Claudia Goldin and Lawrence F. Katz place the evidence on wage inequality squarely in a supply and demand framework and argue convincingly that any explanation based on changing demand for skills must also be based on the dynamics of the supply side of the market. Goldin and Katz also place the well-documented experiences of the past 30 years into a longer historical context, bringing new data to bear on the early part of the twentieth century. They present evidence that the changes in relative demand for skills during the past 30 years were not a historical aberration. Rather, their evidence suggests that demand for skills has been increasing fairly consistently for almost a century. What has changed in the past 30 years, Goldin and Katz argue, is that the relative supply of skills ceased to grow at the rate of this demand expansion. To help make their economic argument, Goldin and Katz offer a fascinating history of the American education system, a story that is elucidating on its own and that helps to make the case that historically supply and demand together have determined changes in inequality in the United States. This interplay of supply and demand for skills is the motivation for the title of the book. Both supply and demand in the market for skills have been expanding in the United States over the past 100 years. Whether wages become more or less equal over shorter horizons, the authors argue, depends on the relative speed of these two expansions— hence “the race.” It is not that they dispute that skill-biased technological change was a root cause of the increased wage inequality of the past 30

Labour mobility and wage inequality in the presence of endogenous foreign investment

This paper examines the impact of labour mobility and increased competition on skilled–unskilled wage inequality and foreign investment. Unlike the existing literature this paper considers a model where foreign investment is endogenously determined. The paper shows that in the shortrun, inflow of either skilled or unskilled labour has no effect on wage inequality but increased competition increases wage inequality. Inflow of either type of labour increases foreign investment but the impact of increased competition on foreign investment cannot be unambiguously determined. Inflow of skilled labour increases wage inequality in the longrun and its effect on foreign investment is positive. Increased competition in the longrun increases wage inequality, foreign investment and welfare.

Government Spending Composition, Technical Change and Wage Inequality

In this paper we argue that government spending played a significant role in stimulating the wave of innovation that hit the U.S. economy in the late 1970s and in the 1980s, as well as the simultaneous increase in inequality and in education attainments. Since the late 1970s U.S. policy makers began targeting commercial innovations more directly and explicitly. We focus on the shift in the composition of public demand towards high-tech goods which, by increasing the market-size of innovative firms, functions as a de-facto innovation policy tool. We build a quality-ladders non-scale growth model with heterogeneous industries and endogenous supply of skills, and show that an increase in the technological content of public spending stimulates R&D, raises the wage of skilled workers and, at the same time, stimulates human capital accumulation. A calibrated version of the model suggests that government policy explains between 12 and 15% of the observed increase in wage inequality in the period 1976-91.

Can a Task-Based Approach Explain the Recent Changes in the German Wage Structure?

Summary This paper investigates the changes in the German wage structure for full-time working males from 1999 to 2006. Our analysis builds on the task-based approach introduced by Autor et al. (2003), as implemented by Spitz-Oener (2006) for Germany, and also accounts for job complexity. We perform a Blinder-Oaxaca type decomposition of the changes in the entire wage distribution between 1999 and 2006 into the separate effects of personal characteristics and task assignments. In line with the literature, we find a noticeable increase of wage inequality between 1999 and 2006. The decomposition results show that the changes in personal characteristics explain some of the increase in wage inequality whereas the changes in task assignments strongly work towards reducing wage inequality. The coefficient effect for personal characteristics works towards an increase in wage inequality at the top of the wage distribution. The coefficient effect for the task assignments on the contrary shows an inverted U-shaped pattern. We conclude that altogether the task-based approach can not explain the recent increase of wage inequality in Germany.

Occupational Mobility and Wage Inequality

In this article we argue that wage inequality and occupational mobility are intimately related. We are motivated by our empirical findings that human capital is occupation specific and that the fraction of workers switching occupations in the U.S. was as high as 16% a year in the early 1970's and had increased to 21% by the mid-1990's. We develop a general equilibrium model with occupation-specific human capital and heterogeneous experience levels within occupations. We find that the model, calibrated to match the level of occupational mobility in the 1970's, accounts quite well for the level of (within-group) wage inequality in that period. Next, we find that the model, calibrated to match the increase in occupational mobility, accounts for over 90% of the increase in wage inequality between the 1970's and the 1990's. The theory is also quantitatively consistent with the level and increase in the short-term variability of earnings. Copyright , Wiley-Blackwell.

On the evolution of wage inequality in Acemoglu's model of directed technical change

In Acemoglu's model of directed technical change, the skill-premium increases in consequence of an increase in the relative supply of skilled labour. In this article, I argue that other measures of wage inequality such as the Gini-coefficient do not necessarily rise as well. The Gini-coefficient depends positively on the skill-premium, but the effect of an increase in the relative supply of skilled labour is ambiguous. A simulation of Acemoglu's model shows that the growth in the relative supply of skilled labour has led to increased wage inequality in the past, but will lead to decreasing wage inequality in the future.

Explaining UK wage inequality in the past globalisation period, 1880–1913

The current era of globalisation has witnessed a rising premium paid to skilled workers resulting in increasing wage inequality in most OECD countries. This pattern differs from that observed during the past globalisation period (1880–1913), in which wage inequality decreased in most of the Old World countries. The present debate over wage inequality focuses on the implications of globalisation, technological change, the role of labour market institutions and education. Similar factors were at work in the past globalisation process. In order to disentangle the main factors that contribute to wage inequality, we calibrate a general equilibrium model for the UK economy in the past globalisation period. The results show that a trade shock and a skilled-biased technology shock increased wage inequality. However, education and emigration had a more significant impact and led to a decrease in wage inequality.

The Functional Specification of the Wage- Experience Relationship and Male Wage Inequality in the Philippines: A Decomposition Analysis

This study analyzed the factors that have contributed to the increase in wage inequality among male workers in the Philippines. Using the Fields (2003) framework as a decomposition platform, the validity of the usual parametric specification of the wage-experience relationship to ascertain the effects of functional misspecification on wage decomposition estimates was investigated. The study found that the quadratic specification of the nonlinear relationship is inadequate, thereby favoring the use of the semiparametric partially linear model, which does not impose any functional assumption on the said relationship.

Can a Task-Based Approach Explain the Recent Changes in the German Wage Structure?

This paper investigates the changes in the German wage structure for full-time working males from 1999 to 2006. Our analysis builds on the task-based approach introduced by Autor et al. (2003), as implemented by Spitz-Oener (2006) for Germany, and also accounts for job complexity. We perform a Blinder-Oaxaca type decomposition of the changes in the entire wage distribution between 1999 and 2006 into the separate effects of personal characteristics and task assignments. In line with the literature, we find a noticeable increase of wage inequality between 1999 and 2006. The decomposition results show that the changes in personal characteristics explain some of the increase in wage inequality whereas the changes in task assignments strongly work towards reducing wage inequality. The coefficient effect for personal characteristics works towards an increase in wage inequality at the top of the wage distribution. The coefficient effect for the task assignments on the contrary shows an inverted U-shaped pattern. We conclude that altogether the task-based approach can not explain the recent increase of wage inequality in Germany.

Increasing Wage Inequality in Japan since the End of the 1990s : An Institutional Explanation

Increasing Wage Inequality in Japan since the End of the 1990s : An Institutional Explanation

Social Security and Retirement During Transition: Microeconometric Evidence from Slovenia

This paper analyses old-age retirement decisions of Slovenian men and women eligible to retire in the period 1997-2003. In addition to established market economies, relatively high hazard rates of retirement are found, which decline with age. This peculiar pattern can be partly attributed to weak incentives to work inherent in the design of social security and is reflected in predominantly negative values of accruals and to transition-specific increases in wage inequality in the late 1980 and early 1990s. The authors also find that the probability of retirement increases with social security wealth and decreases with net wages, although the response to option value to work, with controlling for wage differences, is rather weak. The results also imply that less educated persons, persons with great private wealth and persons entitled to severance payment are more likely to retire.

Labor Inflow Induced Wage Inequality and Public Infrastructure

AbstractBy making use of a simple general equilibrium model of a small open economy, the author examines the link between labor mobility and the size of wage inequality in the presence of productive public infrastructure. The paper shows that the provision of public infrastructure plays an important part in determining the size of labor inflow induced wage inequality. Specifically, it shows that, irrespective of the relative factor intensities, a small inflow of either skilled or unskilled labor does not affect the size of wage inequality if private industries derive equal benefits from public infrastructure provision. A small inflow of skilled (unskilled) labor increases (decreases) wage inequality if skilled (unskilled) labor intensive industry derives more benefits from public infrastructure.

Trade policy and wage inequality: evidence from Indian manufacturing

PurposeThere has been a period of slow but a steady increase in wage inequality in the Indian manufacturing sector since the mid‐1980s, which has gone hand‐in‐hand with an increase in the relative employment of skilled workers across all industries in the same period. The purpose of this paper is to investigate whether the co‐movement of relative employment and wages of skilled workers can be attributed to the changes in trade policy that has occurred in the Indian economy since the mid‐1980s.Design/methodology/approachThe two dominant theoretical perspectives on why trade reforms lay lead to wage inequality are Heckscher–Ohlin theory and trade‐induced skill‐biased technological change (SBTC). The paper evaluates the applicability of these theoretical perspectives to the Indian case using disaggregated industry data from Annual Survey of Industries from 1973 to 1997.FindingsEvidence was found of the validity of both the two dominant theoretical perspectives on wage inequality to explain the co‐movement in wage inequality and relative skill intensity in Indian manufacturing, with both variables increasing in the 1990s. Trade‐induced technological progress has led to an increase in relative skill intensity and wage inequality within industries. At the same time, the decline in protection that seems to have occurred more in unskilled labour‐intensive industries has led to a relative fall in the economy‐wide return to unskilled labour relative to skilled labour. Therefore, trade reforms have led to a widening of wage gap between skilled and unskilled workers, and an increase in relative skill intensity in Indian manufacturing.Originality/valueThe paper contributes to support of the trade‐induced SBTC hypothesis which may provide a consistent explanation of why many countries in the south experienced increases in wage inequality with the onset of trade liberalisation.

Growth and Inequality in Closed and Open Economies: The Role of the Product Cycle

Abstract The product cycle literature suggests that new goods have a higher skill intensity in the early phase of production, which declines once the production process becomes standardized. Using this insight it is shown how an increase in the rate of neutral technological progress, which frees up resources tied in the production of existing goods, leads to increased production of skill intensive new goods and consequently an increase in wage inequality. When technological progress is exogenous, a decrease in skill endowment or trade liberalization with a skill scarce country increases wage inequality but leaves the composition of production between new and standardized goods unaltered. When the rate of technological progress depends on research effort, trade between a skill-abundant Northern economy and a skill-scarce Southern economy can raise wage inequality in both countries and increase productivity growth in the latter. North-North trade increases both wage inequality and productivity growth.

Desigualdad salarial en Colombia 1984-2005: cambios en la composición del mercado laboral y retornos a la educación postsecundaria

El período 1984-2005 se caracterizó por un incremento sustancial en la desigualdad salarial, la cual fue mucho más profunda después de 1995 y más importante en el grupo de los trabajadores más educados. Adicionalmente, después de 1995 el mercado laboral colombiano mostró un crecimiento significativo de la población con educación postsecundaria. Este documento presenta nuevas alternativas para el análisis de la desigualdad en Colombia. Se usa un método para descomponer la desigualdad basado en la estimación de la distribución condicional de ingresos mediante el método de regresión por percentiles, el cual permite descomponer los cambios en la distribución en tres componentes: características, coeficientes y residuales. Finalmente, esta metodología aborda algunas de las deficiencias del método original de la descomposición de Juhn, Murphy y Pierce (1993), que se ha utilizado ampliamente en el caso colombiano. Los resultados muestran que el crecimiento de la desigualdad salarial depende principalmente de los cambios en la distribución de características de los trabajadores para el período 1984-2005. Este resultado es sustancialmente diferente de los encontrados en la literatura colombiana, los cuales muestran que el crecimiento de la desigualdad depende de manera crucial de los residuales, especialmente en aquellos estudios que aplicaron la metodología de Juhn, Murphy y Pierce (1993). Además, usando los coeficientes estimados por el método de regresión por percentiles, este documento muestra que los retornos a la educación postsecundaria tienen un rol significativo en la explicación de la desigualdad en el grupo de los más educados, particularmente por la caída que sufren los retornos en la parte baja de la distribución (50/10) para el período 1995-2005.

Changes in the Distribution of Long-Run Earnings and Retirement Incomes - Have Recent Cohorts Fallen Behind?

This study is motivated by the well-documented increase in wage inequality during the 1980s and the continued high levels of inequality during the 1990s. Specifically, we examine changes in the distribution of long-run earnings and changes in economic mobility for recent cohorts. These cohorts, who either entered retirement in the 1990s or are nearing retirement, experienced very different labor market conditions during their working lives than did earlier cohorts. Economic growth led to higher mean earnings for recent cohorts but the distribution of yearly earnings became less equal. As a result of these changes, the average worker nearing retirement had higher long-run earnings than members of previous cohorts. This, however, need not have translated into higher long-run earnings across the board. Those at the bottom of the distribution of long-run earnings might actually have had lower accumulated earnings than previous cohorts if the gains from growth were more than offset by the increase in inequality of earnings during the 1980s. If the accumulated earnings of those at the bottom of the distribution fell, then this could have had an impact both on decisions about whether to continue to work after the period of normal retirement and on Social Security benefits. The second, and related, policy question is whether mobility has increased. If mobility has increased, then this may partially offset the impact of the increase in earnings inequality. Outcomes may be less equal, but there is less chance of being stuck with a bad outcome. Our ability to measure earnings mobility for five cohorts spanning a twenty-five-year period allows us to address this important question.

Searching for the Smoking Gun: Did Trade Hurt Unskilled Workers?*

We conduct an economy‐wide analysis of the association between trade and wages in New Zealand and decompose the influence of imports on relative wages by sector and region. We find that increased imports resulted in a small increase in wage inequality but this rise was offset by downward pressure on the skill premium due to increased exports. In aggregate, we observe that increased openness (rising imports and exports) decreased New Zealand wage inequality. We also find that imports from developed nations resulted in a greater increase in the New Zealand skill premium than imports from developing nations.