Changes in Wage Inequality, 1970-1990

Abstract

Differences in wages between skill groups declined in the 1970s and rose in the 1980s, but aggregate wage inequality grew throughout the period. This divergence remains a puzzle in recent studies of U.S. wage inequality. In this paper the sometimes divergent paths of inter-group and intra-group inequality are explained by the human capital approach. In it, wages are the return on cumulated human capital investments. In turn, inter-personal distributions of investments and of marginal rates of return on them are determined by individual supply and demand curves. Recent studies have shown that relative growth of human capital supply in the 1970s and of demand in the 1980s generated the U-shaped time pattern of ("between group") skill differentials. Argument and evidence in this paper show that a widening of dispersion among individual demand curves started in the 1970s and generated a continuous expansion of ("within group") residual wage inequality. The widening dispersion in demand curves reflects a growing skill bias in the demand for labor. Aggregate inequality grew throughout the period because within group inequality accounts for the larger part of total inequality. The data also indicate that wage inequality grew in the face of stability in the dispersion of human capital and despite the likely decline in inequality of opportunity, as reflected in the decline in dispersion among supply curves.

JEL Classification: J24, J31