Wednesday, November 07, 2007

Narrowing, Widening, and Polarizing

This new NBER working paper by Claudia Goldin and Larry Katz just made it to the top of the must-read pile. The title and abstract (with my emphasis added):

Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing

The U.S. wage structure evolved across the last century: narrowing from 1910 to 1950, fairly stable in the 1950s and 1960s, widening rapidly during the 1980s, and “polarizing” since the late 1980s. We document the spectacular rise of U.S. wage inequality after 1980 and place recent changes into a century-long historical perspective to understand the sources of change. The majority of the increase in wage inequality since 1980 can be accounted for by rising educational wage differentials, just as a substantial part of the decrease in wage inequality in the earlier era can be accounted for by decreasing educational wage differentials.

Although skill-biased technological change has generated rapid growth in the relative demand for more-educated workers for at least the past century, increases in the supply of skills, from rising educational attainment of the U.S. work force, more than kept pace for most of the twentieth century. Since 1980, however, a sharp decline in skill supply growth driven by a slowdown in the rise of educational attainment of successive U.S. born cohorts has been a major factor in the surge in educational wage differentials. Polarization set in during the late 1980s with employment shifts into high- and low-wage jobs at the expense of the middle leading to rapidly rising upper tail wage inequality but modestly falling lower tail wage inequality.

The sentences that I have highlighted seem directly relevant to this earlier discussion in August 2006 about whether Paul Krugman was right to accuse Treasury Secretary Paulson of "falsely implying that rising inequality is mainly a story about rising wages for the highly educated." (See follow up posts here and here.)

I'll look forward to reading the paper and revisiting the broader issue.


capitalshare said...

These two claims can be easily reconciled. As Paul Krugman and others have repeatedly pointed out much of the rise in income inequality is due to the rapid ascent of income going to the top 1% of income earners (Piketty and Saez report, based on tax data, report their their share of national income rose from 8.9% in 1976 to 21.8% in 2005.) They also point out that most of the increase in income share to this top 1% can be explained by the rise in income to the very richest of these rich (i.e. the top 0.1%)

Most of the income in this group is from returns to capital.

Goldin and Katz on the other hand or speaking strictly about WAGE inequality:

"We use the March [Current Population Survey] files from 1964 to 2006 (covering earnings years 1963 to 2005) to examine the evolution of weekly earnings of full-time, full-year workers..."

Surely you do understand that Stan O'Neal, Ken Lay, Mike Bloomberg, and Bill Gates incomes in this period would NOT be represented in this SAMPLE. In fact no sample from the CPS.

In short returns to education may very well explain a rise in inequality amongst "workers" but this is only one part of the income distribution.

Andrew Samwick said...

Based on that conclusion, do you think that Krugman's original critique of Paulson's speech was valid?

Elliott said...

Yes. And I think your original criticism was shallow and misguided.

Tom said...

Andrew, did you hear the VPR replay of Krugman's talk about income inequality this evening? It was interesting but certainly not convincing...