Abstract

http://ssrn.com/abstract=1278906
 
 

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Real Wage Inequality


Enrico Moretti


University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)


IZA Discussion Paper No. 3706

Abstract:     
A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications. The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand of college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers' standard of living is offset by higher cost of living. The empirical evidence indicates that relative demand shifts are more important than relative supply shifts, suggesting that the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.

Number of Pages in PDF File: 48

Keywords: return to college, general equilibrium, cost of living

JEL Classification: J01

working papers series


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Date posted: October 6, 2008  

Suggested Citation

Moretti, Enrico, Real Wage Inequality. IZA Discussion Paper No. 3706. Available at SSRN: http://ssrn.com/abstract=1278906 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Contact Information

Enrico Moretti (Contact Author)
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
HOME PAGE: http://emlab.berkeley.edu/~moretti/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
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