Explaining Changes in Wages and Income Inequality, 1979 to 2009
In the wake of the Great Recession and the Occupy Wall Street protests, and following the recent English-version publication of Thomas Piketty’s Capital in the Twenty-First Century, income inequality has been the subject of much public discussion in the United States. In 2011, the Congressional Budget Office produced a report for the Senate Committee on Finance entitled “Changes in the Distribution of Workers’ Hourly Wages Between 1979 and 2009”. In this study, the CBO tracks wage levels and wage distribution, and offers some explanations for changes observed over time.
The report finds that the median wage rose by 20% over the 30-year period, to $17 per hour. However, growth in wages was not the same for low, median, and high wage earners, and neither was it the same for men and women. Among men, the change in wages for wage earners in the 10th, median, and 90th percentiles was 5%, 8%, and 40%, respectively. Among women, the change in wages was significantly higher; 8%, 37%, and 70% among wage earners in the 10th, median, and 90th percentiles. As greater numbers of women have entered the labor force and obtained higher education, their wages have risen much faster than those of men, narrowing, but not quite closing, the gender gap.
Within the upper half of the wage distribution, the dispersion (or gap) between median and high-wage earners has increased, with workers in the 90th percentile now earning wages that are 132% higher than the median wage, up from 80% in 1979. Results for women have been similar, with high-wage women earning 122% higher wages than women at the median. Within the lower half of the wage distribution, dispersion increased during the 1980s, but then fell for men and leveled off for women. Today, men in the 10th percentile earn about 50% less than men earning the median wage (roughly unchanged), while women in the 10th percentile earn about 47% less than women earning the median wage, up from 33% less in 1979.
One significant factor in these changes in wage dispersion has been education. The CBO finds that the median male earner with a bachelor’s degree today earns about 72% more than the median male high school graduate, up from 27% in 1979. Results for women are similar, with even more pronounced wage premiums experienced for workers with a graduate degree.
According to the CBO, market forces are the biggest driver behind these changes; in other words, the supply of and demand for labor. Chief among demand-side factors is skill-biased technological change. As technology advanced throughout the period of study, demand increased for non-routine cognitive work, such as complex analysis, evaluation, and decision-making. At the same time, demand decreased for routine cognitive work, such as typing or filing, while demand for routine manual work remained relatively unchanged. As noted above, education plays a significant role in the increase in wage dispersion. Workers with higher levels of education find their way into higher-paying, non-routine cognitive work.
Growing demand for high-skill labor throughout the 20th century was largely met with an increasingly educated labor force. However, the CBO observes a slowdown in the growth of educational attainment. As demand for high-skill labor continues to rise, but educational attainment has slowed, the result has been an increase in wages at the upper end of the distribution. As noted above, women have made up an ever-larger share of the labor force and educational ranks. Without this increase in the supply of educated workers, the CBO notes, wages at the upper end of the distribution would have risen even faster relative to those at the median, leading to even greater wage dispersion.
The CBO also considers several institutional factors, such the minimum wage, union coverage, and globalization.
- The CBO’s analysis suggests that the minimum wage may have propped up wages among workers in the 10th percentile in the early 1980s. As the real minimum wage fell throughout the decade, dispersion between workers at the 10th percentile and median increased. Since then, the minimum wage has not likely played a role in changing wage dispersion.
- Declining union coverage, particularly in the private sector, helps to explain “about one-third of the increase in dispersion in the upper half of the wage distribution for men…but none of the increase in the bottom half.” For women, however, declining union coverage may have actually slowed the increase of wage dispersion, based on differences in how union coverage affects workers in different parts of the wage distribution.
- Globalization – the increased movement of people, goods, and services between nations – has often been the cause of domestic labor frustrations. Foreign labor that is cheaper relative to American labor has allowed firms to shift much of their manual and routine cognitive work abroad, leading to a decrease in demand for American workers, and thus a decrease in their wages. In addition, the United States remains a popular destination for immigrants of varying education and skill levels, which has an impact on the domestic supply of labor.
Overall, the CBO finds that studies on the effects of globalization produce mixed results, and the impact of immigration to the United States has been modest at best.