Despite an active search for the reasons behind the large increase in (within-group) wage inequality in the United States over the last 30 years, identifying the culprit has proved elusive. In this paper we suggest that the increase in the variability of productivity shocks to occupations, coupled with the endogenous response of workers to this change, can account for most of the increase in within-group wage inequality.
Several facts, documented in detail in Section 2, characterize the changes in wage inequality in the U.S. from the early 1970stothemid 1990s. (1) Inequality of hourly wages has increased over the period ? the variance of logs has increased from 0.225 to 0.354, or 57%, while the Ginicoefficient has increased from 0.258 to 0.346, or 34%. (2) Most of the increase in wage inequality was due to rising inequality within narrowly defined age-education subgroups. (3) The increase in wage inequality reflects increased dispersion throughout the entire wage distribution. (4) Individual earnings became substantially more volatile.
Occupational mobility and wage inequality are interrelated because occupational mobility affects the distribution of occupational tenure and, thus, of human capital. In addition, occupations are characterized by fluctuating levels of productivity and demand for their services. Occupation-specific human capital ties people to their occupations and makes switching them difficult.
Thus, the cross sectional wage dispersion depends, among other things, on the distribution of occupationaltenu rein the population, and on the distribution of workers across occupations with different productivities and demands. To evaluate the connection between occupational mobility and wage inequality, one needs an empirically grounded general equilibrium model in which occupational mobility and wage inequality are endogenously determined.
