Rising Wage Inequality: The Role of Composition and Prices

66 Pages Posted: 21 Sep 2005

See all articles by David H. Autor

David H. Autor

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Lawrence F. Katz

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Melissa S. Kearney

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

Abstract

During the early 1980s, earnings inequality in the U.S. labor market rose relatively uniformly throughout the wage distribution. But this uniformity gave way to a significant divergence starting in 1987, with upper-tail (90/50) inequality rising steadily and lower tail (50/10) inequality either flattening or compressing for the next 16 years (1987 to 2003). This paper applies and extends a quantile decomposition technique proposed by Machado and Mata (2005) to evaluate the role of changing labor force composition (in terms of education and experience) and changing labor market prices to the expansion and subsequent divergence of upper- and lower-tail inequality over the last three decades We show that the extended Machado-Mata quantile decomposition corrects shortcomings of the original Juhn-Murphy-Pierce (1993) full distribution accounting method and nests the kernel reweighting approach proposed by DiNardo, Fortin and Lemieux (1996). Our analysis reveals that shifts in labor force composition have positively impacted earnings inequality during the 1990s. But these compositional shifts have primarily operated on the lower half of the earnings distribution by muting a contemporaneous, countervailing lower-tail price compression. The steady rise of upper tail inequality since the late 1970s appears almost entirely explained by ongoing between-group price changes (particularly increasing wage differentials by education) and residual price changes.

Keywords: Wage structure, residual inequality, technological change, labor market institutions, quantile regression

JEL Classification: J3, D3, O3, C1

Suggested Citation

Autor, David H. and Katz, Lawrence F. and Kearney, Melissa S., Rising Wage Inequality: The Role of Composition and Prices (October 2005). ; Harvard Institute of Economic Research Discussion Paper No. 2096. Available at SSRN: https://ssrn.com/abstract=803925 or http://dx.doi.org/10.2139/ssrn.803925

David H. Autor (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Lawrence F. Katz

Harvard University - Department of Economics ( email )

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Melissa S. Kearney

University of Maryland - Department of Economics ( email )

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United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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