Class-Biased Institutional Change and Rising Wage Inequality

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Class-Biased Institutional Change and Rising Wage Inequality. Kim A. Weeden David B. Grusky RC28, Brno, 2007. Fig. 1: Rising wage inequality, 1973-2005. Men. Women. Variance ln(wages). Standard explanation of take-off. Skill-biased technological change (SBTC) - PowerPoint PPT Presentation

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  • Class-Biased Institutional Change and Rising Wage InequalityKim A. Weeden David B. Grusky

    RC28, Brno, 2007

  • Fig. 1: Rising wage inequality, 1973-2005MenWomenVariance ln(wages)

  • Standard explanation of take-offSkill-biased technological change (SBTC)Rising demand and increased productivityMarket assumptionReaction to problems with SBTC accountSniping is normBeyond sniping: Supplement SBTC account with complementary umbrella narrative that has reach of SBTCStanding on the shoulders of giants: Parkin, Srensen, DiPrete, Western, Morris, Picketty, and many more

  • Rent-based approachStarting point: Extra-market institutions of rent extractionRentsWages in excess of counterfactual wage under perfect market competitionDemand for labor cannot be met because of barriers to entryExamplesUnion wage premiumMinimum wageWage premium to occupational closureRent matters

  • Laws of motion of rentConventional view (e.g., Srensen) Rent destruction is global, inevitableMore inequality, but structurelessClass-biased institutional change (CBIC)Rent destruction at bottom of class structureUnionsMinimum wageRent creation at top of class structureSuccessful occupational closure projectsMarket expansion more likely for nonmanual workersAsymmetry of rent creation and destruction is powerful force for inequality-generationWhy the asymmetry? Rent at top is better cloaked with efficiency story (as its only partly a story)

  • Rent creationDiffusion of occupational closureLicenses: Mandated by state10% (1970s) to 20% (2004) of labor force: More licensed workers than union workersMN data: 47 closed occupations in 1968, approx. 160 in 2004Certifications: Voluntary credentials offered by associations also increasing (see Procertis)Increasing use of educational credentials (e.g., MBA)Expanding markets for services of closed occupations

  • CBIC account: Fractal changeSectoral shiftManual occupations (decline of unions, minimum wage)Nonmanual occupations (specialized or abstract knowledge, market expansion)Class shiftsNonmanual sector winners: Managers (credentialing), sales (licensure and certification), professions (market expansion)Manual sector losers (all classes but service)Occupation shifts: Matthew effect in which occupations at top can more readily effect closure

  • DataMay/ORG CPS, 1973-2005Wage and salary workersUnedited earningsTopcode imputationWeighted by hours usually worked1.8 million men, 1.6 million women Approx. 500 occupations (indigenous SOC)10 classes: Featherman-Hauser scheme (prof., mgr., sales, clerical, craft, service, operative, labor, farm, farm labor)2 sectors (nonmanual, manual)

  • Analytic approach

    First cut: Are structural inequalities growing (i.e., four-way decomposition of variance in (log) wages)BS: Between sector (manual vs. nonmanual)BC: Between big classBO: Between occupation WO: Within occupationSecond cut: Are patterns of change consistent with CBIC account?Is manual-nonmanual divide growing?Are big classes winning and losing as predicted?Is between-occupation inequality growing as predicted?

    Structural inequality

  • Fig. 2: Decomposition of mens total wage inequalityTotalWOBSBOVariance ln(wages)Struct.BC

  • Table 1: Estimated change in components of mens wage inequality

  • Fig. 3: Decomposition of womens wage inequalityTotalWOBCBOVariance ln(wages)EStructBS

  • Table 2: Estimated change in components of womens (total) wage inequality

  • Conservative testStructural component is partly generated by education and experience differencesExample: When JD instituted as requirement for becoming a lawyer, two interpretations of resulting restriction on labor supply obtainSBTC: New educational requirement reflects new skill requirementsCBIC: New educational requirement is imposed without precipitating changes in skillLower-bound estimate: How large are structural effects if education and experience are given over wholly to STBC? Residual wage inequality (i.e., standard Mincerian wage regression)Education (5 categories)Potential experience quarticFull interactions between education and experience

  • Table 3: Structural share of residual wage inequality

  • Fig. 4: Nonmanual sector: Mens residual wagesMgr.Prof.ClericalNOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition Smoothed CoefficientSales

  • Mgr.Prof.ClericalNOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition Smoothed CoefficientSalesFig. 5: Nonmanual sector: Womens residual wages

  • CraftLaborServiceNOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition Smoothed CoefficientOper.Fig. 6: Manual sector: Mens residual wages

  • CraftLaborServiceNOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition Smoothed CoefficientOper.Fig. 4: Manual sector: Womens residual wages

  • Summary of class-specific trendsNonmanual sector Managers and professionals pulling away (esp. after 1982)Sales: Curvilinear trend explicable in rent termsClerical workers: Wage declinesManual sectorCraft, operative, and labor wages declined (except that craft wages for women increased in 1970s)Service class wages increased

  • ConclusionsCBIC account has potential (albeit evidence is just as indirect as that on behalf of SBTC)Implications for future of inequalityDecline in inequality is not intrinsic effect of industrialization (e.g., Kuznets Curve) but historically contingent process Rent-creation at top has more staying powerCulture: Cloaked with efficiency storyPower: Backed by powerful actorsA long run-up is plausible