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The Evolution of Inequality and Relative Wages in the United States

The Evolution of Inequality and Relative Wages in the United States. Kevin M. Murphy John von Neumann Lecture May 18, 2009. Steps in the Analysis. Understand what has happened Understand the marketplace Draw implications for policy. What has happened?.

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The Evolution of Inequality and Relative Wages in the United States

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  1. The Evolution of Inequality and Relative Wages in the United States Kevin M. Murphy John von Neumann Lecture May 18, 2009

  2. Steps in the Analysis • Understand what has happened • Understand the marketplace • Draw implications for policy

  3. What has happened? • We will examine two aspects of the change in inequality • Changes in the returns to education • Changes in relative wages more generally

  4. Education

  5. Education Wage Premiums

  6. Education Premiums by Gender

  7. Education Premiums by Race

  8. Broader Changes in Relative Wages • General wage inequality has increased along with the education premium • We can track the growth in inequality by following wages at different “places” in the wage distribution • We will follow three types of workers: • Low wage workers = 10th percentile • Middle wage workers = 50th percentile • High wage workers = 90th percentile

  9. Overall Rise in Wage Inequality for Men

  10. Wage Growth by Percentile 1968-2004

  11. Wage Growth by Percentile 1968-1977

  12. Wage Growth by Percentile 1977-1986

  13. Wage Growth by Percentile 1986-1995

  14. Wage Growth by Percentile 1995-2004

  15. Bottom Line on Wage Changes • Inequality has increased greatly • Increases in inequality have been increasingly concentrated at the top of the distribution over the past 40 years • We see this with education where graduate premiums have continued to increase while college premiums have leveled off

  16. Why?

  17. Understanding the Market for Skill Supply & Demand

  18. Growth in Education Demand

  19. Demand Changes by Wage Percentile

  20. Supply & Demand • Growth in the college premium can be explained by a simple model • Model based on Katz-Murphy 1992 • The model: • Demand grows steadily over time • Fluctuations in supply cause education premiums to fluctuate • Supply grows faster than demand  premium falls • Demand grows faster than supply  premium rises

  21. Supply Growth & Relative Wages

  22. The Supply Response • Growth in the college premium has generated a predictable response – more people have gone on to college

  23. Wage Ratios & College Enrollment

  24. Summary of Data • Education & skill premiums have increased over time • The shift in demand has been increasingly concentrated at the top of the distribution in recent years • Growth in the demand for skill is the key • Equilibrium premiums reflect the combination of supply and demand • Supply responds to price

  25. Policy Implications

  26. Key Ingredients • The growth in wage inequality represents a demand-driven “price” change • Inequality and education premiums reflect a rising premium on skill • Higher returns to skill generate an incentive for more people to invest in schooling & other skills • More people going to school increases the supply of human capital

  27. Thinking More About Inequality • There are two sides to the growth in the price of skill • An increase in inequality – many regard this as bad • An increase in the return on human capital investment • Regardless of your view on the first it would be good to take advantage of the second

  28. The Positive Side • A greater return to human capital will increase the return to existing investments • A greater return to human capital will further increase growth by encouraging more investment in human capital • More investment will help reduce inequality through the effect of supply

  29. What should be the policy response? • The market response to a higher premium for skill has been and will be to increase the supply of skilled workers • Increases in the supply of skill will help check the growth in inequality • This “balancing” act between supply and demand has operated throughout the 20th century

  30. Important Issues • The growth in college graduates has lagged behind growth in the number going to college • May reflect the fact that many students are not well prepared for college • Long-run supply should be more elastic as more get prepared – but how much more? • The cost of poor preparation/schooling is higher than before  greater need to improve schools & young child preparation • Education has also become more important in other areas like health

  31. The Bottom Line • Think about growing inequality as a rise in the price of skill driven by increased skill demand = skill has become more valuable • The best response to more demand is to increase the quantity supplied • Other approaches to “addressing” the issue reduce our ability to take advantage of the higher return to human capital

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