Outline reasons for wage inequality in the US labor market

Real Wage Inequality†
By Enrico Moretti*
While nominal wage differences between skilled and unskilled workers
have increased since 1980, college graduates have experienced
larger increases in cost of living because they have increasingly
concentrated in cities with high cost of housing. Using a cityspecific
CPI, I find that real wage differences between college and
high school graduates have grown significantly less than nominal
differences. Changes in the geographical location of different skill
groups are to a significant degree driven by city-specific shifts in
relative demand. I conclude that the increase in utility differences
between skilled and unskilled workers since 1980 is smaller than
previously thought based on nominal wage differences. (JEL J22,
J23, J24, J31, R23, R31)
One of the most important developments in the US labor market over the past 30
years has been a significant increase in wage inequality. For example, the difference
between the wage of skilled and unskilled workers has increased significantly
since 1980. The existing literature has focused on three classes of explanations: an
increase in the relative demand for skills caused, for example, by skill-biased technical
change; a slowdown in the growth of the relative supply of skilled workers; and
the erosion of labor market institutions that protect low-wage workers.1
In this paper, I reexamine how inequality is measured and how it is interpreted. I
begin by noting that skilled and unskilled workers are not distributed uniformly across
cities within the United States, and I assess how existing estimates of inequality change
when differences in the cost of living across locations are taken into account. I then use
a simple general equilibrium model of the housing and labor markets to understand how
changes in these measures of real wage inequality relate to changes in utility inequality.

 

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