During the early 1980s, earnings inequality in the U.S. labor market rose relatively uniformly throughout the wage distribution. Between 1979 and 1987, the male 90/50 log hourly earnings ratio rose by 8.5 log points and the 50/10 earnings ratio rose by 13.0 log points (see Figure 1). This simultaneous expansion of upper and lower-tail inequality gave way to a significant divergence thereafter. During each of the two subsequent 8 year intervals, 1987 to 1995 and 1995 to 2003, 90/50 inequality rose by an additional 5.2 and 9.7 log points respectively, while 50/10 inequality contracted to levels roughly comparable to 1979. In fact, fully 90 percent of the net increase in male 90-10 earnings inequality between 1979 and 2003 is accounted for by the rise in the 90-50 wage gap.
Residual inequality that is, wage dispersion within demographic and skill groups defined by sex, education, and experience (age) followed a roughly similar pattern, rising both above and below the median between 1979 and 1987, and then diverging thereafter (Figure 2). As discussed in Autor, Katz and Kearney (2005), this divergence in inequality trends presents a puzzle for canonical explanations for rising wage inequality. Hypotheses such as falling real minimum wages, declining unionization, and monotonically rising demand for 'skill' (often viewed as driven by Skill Biased Technical Change 'SBTC') do not generally predict steadily increasing upper-tail inequality paired with fluctuating lower tail inequality.
In this paper, we explore one potential explanation for the disparate patterns of upper and lower-tail inequality observed in the last two decades: the changing age and educational composition of the U.S. labor force. As shown in Figure 3, the education and experience of the U.S. labor force rose substantially over the last 25 years as the large 1970s college cohorts reached mid-career during the 1990s.
The full-time equivalent employment share of male workers with a college degree rose from 18 to 32 percent of the U.S. male labor force between 1973 and 2003 and the employment share of workers with high school or lower education fell from 62 to 41 percent. Gains in potential experience were similarly pronounced: the mean potential experience of males of high school or greater education rose by 2 to 5 years between 1973 and 2003, with the largest gains experienced by the most educated groups. Increases in education and potential experience among female workers were similarly large.
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Rising Wage Inequality: The Role of Composition and Prices
