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

Var

ianc

e ln

(wag

es)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Standard explanation of take-off

Skill-biased technological change (SBTC) Rising demand and increased productivity Market assumption

Reaction to problems with SBTC account Sniping is norm Beyond sniping: Supplement SBTC account with

complementary umbrella narrative that has reach of SBTC

Standing on the shoulders of giants: Parkin, Sørensen, DiPrete, Western, Morris, Picketty, and many more

Rent-based approach

Starting point: Extra-market institutions of rent extraction

Rents Wages in excess of counterfactual wage under

perfect market competition Demand for labor cannot be met because of

barriers to entry Examples

Union wage premium Minimum wage Wage premium to occupational closure

Rent matters

Laws of motion of rent

Conventional view (e.g., Sørensen) Rent destruction is global, inevitable More inequality, but “structureless”

Class-biased institutional change (CBIC) Rent destruction at bottom of class structure

Unions Minimum wage

Rent creation at top of class structure Successful occupational closure projects Market expansion more likely for nonmanual workers

Asymmetry of rent creation and destruction is powerful force for inequality-generation

Why the asymmetry? Rent at top is better cloaked with efficiency story (as it’s only partly a “story”)

Rent creation

Diffusion of occupational “closure” Licenses: Mandated by state

10% (1970s) to 20% (2004) of labor force: More licensed workers than union workers

MN data: 47 closed occupations in 1968, approx. 160 in 2004

Certifications: 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 change

Sectoral shift Manual occupations (decline of unions,

minimum wage) Nonmanual occupations (specialized or

abstract knowledge, market expansion)

Class shifts Nonmanual 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

Data

May/ORG CPS, 1973-2005 Wage and salary workers

Unedited earnings Topcode imputation Weighted by hours usually worked 1.8 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 class BO: Between occupation WO: Within occupation

Second 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

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Fig. 2: Decomposition of men’s total wage inequality

Total

WO

BSBO

Var

ianc

e ln

(wag

es)

Struct.

BC

Table 1: Estimated change in components of men’s wage inequality

Component

% of total increase

% share in

1973

% share in

2005

Structural 66.3 30.9 43.5

Between-sector

38.7 5.8 17.5

Between-class

6.3 11.5 9.7

Between-occupation

21.3 13.6 16.4

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Fig. 3: Decomposition of women’s wage inequality

Total

WO

BCBO

Var

ianc

e ln

(wag

es)

E

Struct

BS

Table 2: Estimated change in components of women’s (total) wage inequality

Component

% of total increase

% share in

1973

% share in

2005

Structural 55.2 37.7 45.9

Between-sector

18.7 12.7 15.5

Between-

class

13.0 13.2 13.1

Between-occupation

23.6 11.8 17.3

Conservative test Structural component is partly generated by education and

experience differences Example: When JD instituted as requirement for becoming

a lawyer, two interpretations of resulting restriction on labor supply obtain SBTC: New educational requirement reflects new skill requirements CBIC: New educational requirement is imposed without precipitating

changes in skill

Lower-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 quartic Full interactions between education and experience

Table 3: Structural share of residual wage inequality

Component

Men Women

% share in 1973

% share in 2005

% share in 1973

% share in 2005

Structural 22.9 25.0 27.4 28.9

Between-sector

0.2 3.0 5.6 5.6

Between-class

9.5 6.4 8.4 11.3

Between-occupation

13.3 15.6 13.4 18.0

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

Fig. 4: Nonmanual sector: Men’s residual wages

Mgr.Prof.

Clerical

NOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition

Smoo

thed

Coe

ffic

ient

Sales

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

Mgr.Prof.

Clerical

NOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition

Smoo

thed

Coe

ffic

ient

Sales

Fig. 5: Nonmanual sector: Women’s residual wages

-0.4

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

Craft

Labor

Service

NOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition

Smoo

thed

Coe

ffic

ient

Oper.

Fig. 6: Manual sector: Men’s residual wages

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

Craft

Labor

Service

NOTE: Trends are smoothed with 3-year moving average, and are net of occupational composition

Smoo

thed

Coe

ffic

ient

Oper.

Fig. 4: Manual sector: Women’s residual wages

Summary of class-specific trends

Nonmanual sector Managers and professionals pulling away (esp. after

1982) Sales: Curvilinear trend explicable in rent terms Clerical workers: Wage declines

Manual sector Craft, operative, and labor wages declined (except that

craft wages for women increased in 1970s) Service class wages increased

Conclusions

CBIC account has potential (albeit evidence is just as indirect as that on behalf of SBTC)

Implications for future of inequality Decline in inequality is not intrinsic effect of industrialization

(e.g., Kuznets Curve) but historically contingent process Rent-creation at top has more staying power

Culture: Cloaked with efficiency story Power: Backed by powerful actors

A long run-up is plausible