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Outline_USA_7898_Rev.ppt 1
U.S. Wages and Salaries, A Decomposition of Wage and
Industry Effects: 1978, 1988, & 1998
Stephen Cooke8 October 2004
Dept. of Ag . & Resource Ec. SeminarUC Berkeley
Outline_USA_7898_Rev.ppt 2
Summary Slide
• Problem Definition• Literature review• The Theory• Results and Interpretation• Summary and Conclusions
Outline_USA_7898_Rev.ppt 3
Problem Definition
Outline_USA_7898_Rev.ppt 4
Per Worker and Per Capita Payments and Growth in U.S.: 1978, 1988, and 1998 (cpi 1998=100)
133,070113,42994,330Employment (thous.)
$ 18,189$ 16,522$ 15,353Per capita net
earnings
$ 5,147$ 4,559$ 2,890
Per capita dividends, interest and rent
$ 23,335$ 21,081$ 18,245Per capita total
199819881978Payments
$ 31,411 $ 29,666 $ 29,569 Per worker wages and
salaries
Outline_USA_7898_Rev.ppt 5
Per Worker and Per Capita Payments and Growth in U.S.: 1978, 1988, and 1998 (cpi 1998=100)
34.4%16.0%18.4%Employment
17.0%9.6%7.3%Per capita net earnings
1978/981988/981978/88Growth
24.6%10.2%14.5%Per capita total
57.7%12.1%45.6%Per capita dividends,
interest and rent
6.04%5.72%0.33%Per worker wages and
salaries
Outline_USA_7898_Rev.ppt 6
Per Worker Wages and Salaries in U.S.: 1978, 1998, and 1998 (cpi 1998=100)
6.04%5.72%0.33%Per worker wages
and salaries
1978/981988/981978/88Growth
80%92%53%Paired t-test, 1 tail
757575N (no. of sectors)
199819881978Payment
.079.071.058Thiel T’
1.811.430.24Skewness
$ 18,314$ 15,974$ 11,566Standard dev.
$ 31,411 $
29,666 $ 29,569 Per worker wages
and salaries
Outline_USA_7898_Rev.ppt 7
Table Determining the Source of Lower Wages
worst casePower and
BarrettLow wages
conventionalwisdom“past”High wages
Low paying industries
High paying industries
Explanations for low wages
Outline_USA_7898_Rev.ppt 8
Interpreting the Wage &Industry Effects
• Wage effect– Movement of high
quality factors toward or away from a region
– Solow (convergence)– Romer & Lucas
(divergence)
• Industry effect– Movement of high
value industries toward or away from a region
– Heckscher-Ohlin(convergence)
– Krugman (divergence)
Outline_USA_7898_Rev.ppt 9
Growth and Trade Policies
• If wage effect is negative, then– Increase investment in physical and human
capital, e.g., education and technology – Primary factors policies (labor vs capital?)
• If industry effect is negative, then– Increase competitive advantage by improving
local resources and institutions – Place policies (urban vs rural?)
Outline_USA_7898_Rev.ppt 10
Literature Review
Outline_USA_7898_Rev.ppt 11
Hamermesh, Daniel S. and Grant, James.• "Econometric Studies of Labor-Labor Substitution and Their Implications for
Policy." Journal of Human Resources, 1979, 14(4), pp. 518-42.
• Physical and human capital are complements and are jointly substitutable with raw labor.
• Future research should concentrate on substitution among workers
Outline_USA_7898_Rev.ppt 12
Bluestone, Barry and Harrison, Bennett
• "The Growth of Low-Wage Employment: 1963-86." American Economic Review., 1988, 78(2 (May)), pp. 124-28.
• The data suggest a rising low-wage share and growing wage polarization, at least after 1979. – The decline in unionization– The erosion in the real value of the minimum wage– The widespread existence of wage concession bargaining– Two-tier wage structures in a number of large industries. – The growing business practice of "outsourcing" to achieve
lower labor costs– The secular shift of capital from directly productive to overtly
speculative investment
Outline_USA_7898_Rev.ppt 13
Krueger, Alan B. and Summers, Lawrence H.
• "Efficiency Wages and the Inter-Industry Wage Structure." Econometrica: Journal of the Econometric Society, 1988, 56(2), pp. 259-93.
• Empirically tests and rejects classical competitive theories of wage determination by examining differences in wages for equally skilled workers across industries.
• These findings suggest that workers in high wage industries receive noncompetitive rents.
Outline_USA_7898_Rev.ppt 14
Bound, John and Johnson, George• "Changes in the Structure of Wages in the 1980's: An Evaluation
of Alternative Explanations." American Economic Review, 1992, 82(3), pp. 371-91.
• During the 1980's, there were large changes in the structure of relative wages, most notably a huge increase in the relative wages of highly educated workers.
• Our conclusion is that their major cause was a shift in the skill structure of labor demand brought about by biased technological change
Outline_USA_7898_Rev.ppt 15
DiNardo, John; Fortin, Nicole M. and Lemieux, Thomas.
• "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach." Econometrica: Journal of the Econometric Society, 1996, 64(5), pp. 1001-44.
• de-unionization and supply and demand shocks were important factors in explaining the rise in wage inequality from 1979 to 1988.
• The decline in the real value of the minimum wage explains a substantial proportion of this increase in wage inequality, particularly for women.
Outline_USA_7898_Rev.ppt 16
Valletta, Robert G.
• "Effects of Industry Employment Shifts on U.S. Wage Structure,1979-1995." Federal Reserve Bank of San Francisco Economic Review, 1997, 1, pp. 16-32.
• Earlier analyses revealed that average earnings are lower, and earnings inequality is higher for service-producing workers than for goods-producing workers.
• During the period 1979–1995 the results show at most a small effect of industry employment shifts on growing inequality in male hourly earnings.
Outline_USA_7898_Rev.ppt 17
Calmon, Paulo Du Pin; Conceicao, Pedro; Galbraith, James K.; Cantu, Vidal Garza and Hibert, Abel.
• "The Evolution of Industrial Earnings Inequality in Mexico and Brazil." Rev Development Economics, 2000, 4(2), pp. 194-203.
• Mexico and Brazil show increases in wage dispersion over time, and a strong negative correlation is found with the rate of real economic growth.
Outline_USA_7898_Rev.ppt 18
The Theory
Outline_USA_7898_Rev.ppt 19
Hanna and LaCroixWage and Industry Indices
0101
1010
1111
0000
nnnn
nnnn
nnnn
nnnn
NWNWNWNWNWNWNWNW
=•
=•
=•
=•00
01
10
11
_
_
nn
nn
nn
nn
NWNWWageLaCroix
NWNW
WageHanna
=
=
01
11
00
10
_
_
nn
nn
nn
nn
NWNWIndustryLaCroix
NWNWIndustryHanna
=
=
Outline_USA_7898_Rev.ppt 20
Hanna and La Croix Wage Indices
0W 1W
)( iWf
0E
1EA
B
E
iW 1−iW
)( 1/iWf
E
0E
1E
C
D
0W 1W
)( iWf
)( 0/iWf
Outline_USA_7898_Rev.ppt 21
Contradictory Results
• For both Hanna and La Croix indices:(Wage index)( Industry index) = Total index
• Hanna total index = La Croix total index• However:
Hanna wage index ≠ La Croix wage indexHanna industry index ≠ La Croix industry index
• Sometimes they are contradictory!• Needed: a consistent and defensible wage index
Outline_USA_7898_Rev.ppt 22
Avg. wages as a function ofavg. sector wages
AB
0E
1E
0W 1W
)( iWf
iW 1−iW
1iW
D
C
F
0iWW
Outline_USA_7898_Rev.ppt 23
Wage index derivation• Assume a continuous, twice-differentiable, concave
quadratic average wage function in which the region’s industrial structure is constantW = Σi(ai0 + ai1wi - ai2wi
2) • This functional form implies that skilled and less skilled
labor are imperfect substitutes in all industries. • Then apply a second-order Taylor series expansion to
W=f(wi)• Adapt Shepherd's lemma in which the 1st derivative of
a logarithmic Cobb-Douglas cost function equals the factor share
• Diewert’s quadratic lemma: the geometric mean of two 1st order approximations equals a second order measure
Outline_USA_7898_Rev.ppt 24
Wage decomposition equation andthe Theil inequality index (T’)
Total effect = wage effect + industry effect
)1ln()/(ln)(½)/ln( 011001 µ+++=∑ iii
ii wwssWW
( )∑=i
ii WwsT ln'
W: avg. overall wage/jobw: avg. sector wage/job s: share sector’s wage billu: industry effect i: sector; time: 0..1
Theil inequality index (T’)
Outline_USA_7898_Rev.ppt 25
jW1
01W
*11W1
1W
11W*0
1W jn
jj WWW ...| 21
0E
A
1E
0E 1E
*1E
Wage and Industry Effects as Substitution and Output Effects
E0E1: Total effect (+)
E0A: Wage Effect (+)
AE1: Industry Effect (-)
Outline_USA_7898_Rev.ppt 26
Change in the Theil Inequality index (overall between sectors, T’ and wage effect, TF’)
w,/W: ratio of avg. sector wage per job to overall average
ni: ratio of labor in sector i to overall labor
i sectors; time 0..1T ∈ {0, log(n)}Conceicao & Galbraith,
2000, pp. 65, 68
( ) ( )
( ) ( )∑
∑
++=
++=
•
•••
i i
iii
i
iiii
iiiiiiii
Ww
WwWwnWwn
nnnWwWwT
WwnWwnnWwWwT
ii 0
10111
0
1011'
'
)(
)(log)()log(log)log()(
)()log()log()(_)5(
( )
( )∑
∑
+=
+=
•
••
i i
iiiiF
iiiiF
Ww
WwWwWwnT
WwWwnT
0
1011
'
'
)(
)(log)(1)log(
)(1)log(_)13(
Theil (T’) effect = industry + wage effects
Theil wage effect (TF’)
Outline_USA_7898_Rev.ppt 27
Results and Interpretation: U.S. Wages and Salaries
Outline_USA_7898_Rev.ppt 28
U.S. Wages and Salaries (cpi 1998=100)
$92-$38$130
$87-$18$105
$5-$20$25
A. diff. W/J
$12,255,497,700$31,4116.04%Total-$5,010,139,942$31,411-2.37%Industry$17,265,637,642$32,1648.41%Wage
$29,56940.0%cpi$11,8280.0%1998/78
$11,611,059,709$31,4115.72%Total-$2,393,457,563$31,411-1.14%Industry$14,004,517,272$31,7716.85%Wage
$29,66672.6%cpi$21,5310.0%1998/88
$549,319,582$29,6660.33%Total-$2,314,081,551$29,666-1.37%Industry$2,863,401,134$30,0741.69%Wage
$29,56940.0%cpi$11,8280.00%1988/78
A. Changein W
real avg.W/J
growth rate
Year/index
Outline_USA_7898_Rev.ppt 29
U.S. Wage & Salaries Wage and TheilIndices: 1978 to 1998
Wage decomposition (%)6.05.70.3T-effect
Theil inequality index (T’ between industries only)-2.4-1.1-1.4I-effect8.46.81.7W-effect
.016.007.012T’-total
-.033-.014-.019T’-industry.049.021.031T’-wage
1998/781998/881988/78Index
Outline_USA_7898_Rev.ppt 30
The Fat Epidemic: He says it’s an illusion
• Dr. Jeffrey Friedman (Rockefeller U.)– Obesity researcher at Howard Hughes Medical
Institute– “national data do not show Americans growing
uniformly fatter” (NYT 6/8/04, p. D5)– “from 1991 to present … the lower end of the weight
distribution, nothing has changed, not even by a few pounds … only the massively obese, the very top of the distribution is there a substantial increase in weight, about 25 to 30 pounds”
Outline_USA_7898_Rev.ppt 31
Wage Effects on Avg. Wages
• An across the board proportionate change in wages per job (sign - or +) regardless of the distribution
iS
iW iW
iS
1W 0W 0W 1W
Outline_USA_7898_Rev.ppt 32
Negative Industry Effects Cause a Decrease in the Mean
C. Low value industries that expand (↑)(L) = (+)( -)
(skewed to the right, µ3 > 0)
D. High value industries that contract(↓)(H) = (-)(+)
iS
iW1W 0W
iS
iW1W 0W
Outline_USA_7898_Rev.ppt 33
1978 U.S. Frequency of Jobs by Wage (cpi 1998=100)
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
$61,
671
$51,
403
$47,
554
$44,
406
$43,
488
$40,
273
$38,
912
$36,
613
$35,
007
$33,
171
$29,
849
$28,
230
$26,
338
$25,
608
$24,
422
$21,
059
$19,
792
$18,
115
$14,
253
Wage/job/year
# of
jobs
Outline_USA_7898_Rev.ppt 34
1978 U.S. Frequency of Jobs by Wage (cpi 1998=100)
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
Sec
urity
and
com
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roke
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osito
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isce
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turin
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ries
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omot
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and
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ice
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Loc
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teru
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and
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atin
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s P
rivat
e ho
useh
olds
Wage/job/year
# of
jobs
Outline_USA_7898_Rev.ppt 35
1978 Frequency of jobs by salary(cpi 1998=100)
05,000,000
10,000,00015,000,00020,000,00025,000,00030,000,00035,000,00040,000,00045,000,00050,000,000
$10,
000
$15,
000
$20,
000
$25,
000
$30,
000
$35,
000
$40,
000
$45,
000
$50,
000
$55,
000
$60,
000
$65,
000
$70,
000
$150
,000
Wage/job/year
# of
jobs
1978
Outline_USA_7898_Rev.ppt 36
Outline_USA_7898_Rev.ppt 37
Outline_USA_7898_Rev.ppt 38
Outline_USA_7898_Rev.ppt 39
Gaussian probability density function
)2
(1_2
)(5. 2
πσ
∑−
−
= i
hwx
ii
eNn
hpdfGaussian
Silverman, B. W. Density Estimation for Statistics and Data Analysis. 1986
Outline_USA_7898_Rev.ppt 40
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Outline_USA_7898_Rev.ppt 49
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Outline_USA_7898_Rev.ppt 51
Outline_USA_7898_Rev.ppt 52
Summary and Conclusions
Outline_USA_7898_Rev.ppt 53
Summary• I developed a CES average wage function
– Derived 2nd order approximation using Taylor series– CES is exact
• Industry effect seems more important than it is because the wageeffect has industry effect characteristics– Technology bias– Substitution of skilled for unskilled labor and vice versa within industries– High skill – high wage industries becoming more or less so
compounds the perception of actual industry effect
• Thiel index shows that the negative industry effect can result in greater wage equality and conversely for the wage effect
Outline_USA_7898_Rev.ppt 54
Table Determining the Source of Wage Change
worst casePower and
BarrettLow wages
conventionalwisdom“past”High wages
Low paying industries
High paying industries
Explanations for low wages
Outline_USA_7898_Rev.ppt 55
Growth and Trade Policies
• If industry effect is negative, then– Increase competitive advantage by improving
local resources and institutions – Place policies (urban vs rural?)
Outline_USA_7898_Rev.ppt 56
References• Conceicao, Pedro and Galbraith, James K. "Constructing Long and
Dense Time-Series of Inequality Using the Theil Index." Eastern Economic Journal, 2000, 26(1), pp. 61.
• Cooke, Stephen “Wage and Industry Effects in U.S. Regional Income, 1840 to 1987: A CES Wage Index Method” J. of Econ. History 63(2003): 1131-1146.
• Diewert, W. E., “Exact and Superlative Index Numbers” Journal of Econometrics 4(May):115-45, 1976.
• Hanna, Frank. “Contribution of Manufacturing Wages to Differences in per capita Income.” Review of Economics and Statistics 33(Feb. 1951): 18-28.
• La Croix, Sumner. “Economic Integration and Convergence: A Second Decomposition Method” J. of Econ. History 59(1999): 773-785.
• Silverman, B. W. Density Estimation for Statistics and Data Analysis. London; New York: Chapman and Hall, 1986.
• Theil, Henri. Economics and Information Theory. Chicago,: Rand McNally, 1967.
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