Earnings Inequality 1 Inequality and Growth Dennis J. Snower

Earnings InequalityEarnings Inequality 11

Inequality and GrowthInequality and Growth

Dennis J. SnowerDennis J. Snower


Easily Explicable Easily Explicable Stylized Stylized FactsFacts

Earnings DispersionEarnings DispersionFrom the beginning of the 1950s till the mid-1970s, the U.S. From the beginning of the 1950s till the mid-1970s, the U.S.

distribution of real earnings was stable; since then earnings distribution of real earnings was stable; since then earnings dispersion has increased rapidly.dispersion has increased rapidly.

The entire distribution of U.S. earnings has been pulled apart.The entire distribution of U.S. earnings has been pulled apart.

Between mid-1970 and mid-1990, only the top fifth of the male Between mid-1970 and mid-1990, only the top fifth of the male U.S. working population experienced rising earnings. U.S. working population experienced rising earnings.

The U.S. Skill PremiumThe U.S. Skill PremiumBy several alternative measures of skill (education premium, By several alternative measures of skill (education premium,

experience premium, non-production premium), the earnings experience premium, non-production premium), the earnings of skilled workers have risen relative to those of unskilled of skilled workers have risen relative to those of unskilled workers over the past two decades.workers over the past two decades.


Labor supply effectsLabor supply effectsThe U.S. earnings distribution has been influenced by The U.S. earnings distribution has been influenced by

changes in the relative supply of skilled vs. unskilled changes in the relative supply of skilled vs. unskilled workers.workers.

Unionization and centralized Unionization and centralized bargainingbargainingCountries with high rates of unionization and centralized Countries with high rates of unionization and centralized

bargaining tend to have greater wage equality.bargaining tend to have greater wage equality.

However, there is a pronounced trend toward However, there is a pronounced trend toward decentralized wage bargaining in many OECD countries.decentralized wage bargaining in many OECD countries.


The Conventional ExplanationThe Conventional Explanation

The skilled vs unskilled labor marketThe skilled vs unskilled labor market

Skilled Demand

Unskilled Demand

Relative Supply

ws*

wu*

Skilled SupplyUnskilled Supply


An increase in the relative skill supplyAn increase in the relative skill supply

Skilled Demand

Unskilled Demand

Relative Supply

ws*

wu*

Skilled EmploymentUnskilled Employment


Inferred shifts in relative demand vs relative Inferred shifts in relative demand vs relative supplysupply

Skilled Demand

Unskilled Demand

Relative Supply

ws*

wu*

Skilled EmploymentUnskilled Employment


Wage rigidities and unemploymentWage rigidities and unemployment

Skilled Demand

Unskilled Demand

Relative Supply

ws*

wmin

Skilled Employment Unskilled EmploymentUnemployment


Reasons for the shifts in relative Reasons for the shifts in relative demanddemand

GlobalizationGlobalization De-industrializationDe-industrialization Skill-biased technological changeSkill-biased technological change


Problems with the globalization hypothesisProblems with the globalization hypothesis

• The ubiquitous rise in the demand for skillsThe ubiquitous rise in the demand for skills• Problems of timingProblems of timing• Deficient labor mobility between tradable and non-Deficient labor mobility between tradable and non-

tradable sectorstradable sectors• Changes in the composition of outputChanges in the composition of output• The importance of domestic labor suppliesThe importance of domestic labor supplies


Problems with the technological change Problems with the technological change hypothesishypothesis

• The charge of tautologyThe charge of tautology• The direction of causationThe direction of causation• The extensiveness of extensive technological The extensiveness of extensive technological

changechange• The influence of technological change on high The influence of technological change on high

earningsearnings• The experience premiumThe experience premium• The gender earnings premiumThe gender earnings premium• International evidence on earnings dispersionInternational evidence on earnings dispersion• U.S. unemployment and the minimum wageU.S. unemployment and the minimum wage


Gender PremiumGender PremiumFor men, the increased earnings dispersion is due more to For men, the increased earnings dispersion is due more to

the losses of the lowest earners than to the gains of the the losses of the lowest earners than to the gains of the highest earners.highest earners.

Women, however, have seen gains through the earnings Women, however, have seen gains through the earnings distribution, with the highest earners experiencing the distribution, with the highest earners experiencing the fastest earnings growth.fastest earnings growth.

EarningsEarnings--DispersionDispersion / / Unemployment Unemployment Trade-offTrade-offComparing OECD countries over the past 25 years, there is Comparing OECD countries over the past 25 years, there is

no clear trade-off between wage dispersion and no clear trade-off between wage dispersion and unemployment.unemployment.

Puzzling Puzzling Stylized FactsStylized Facts


Earnings InstabilityEarnings InstabilityOver the 1980s in the U.S., the overall increase Over the 1980s in the U.S., the overall increase

in earnings dispersion was due as much to in earnings dispersion was due as much to earnings instability as to permanent changes earnings instability as to permanent changes in earnings inequality.in earnings inequality.

Within-Group InequalityWithin-Group InequalityIn the U.S. at least half of the rise in earnings In the U.S. at least half of the rise in earnings

inequality occurred within groups, defined by inequality occurred within groups, defined by observable traits such as education, observable traits such as education, experience, race, and gender.experience, race, and gender.


Recent Evidence on the Recent Evidence on the Polarization of WorkPolarization of Work

For the US, the growth of wage inequality slowed For the US, the growth of wage inequality slowed in the 1990s,in the 1990s,• rising in the first half of the 90s and falling in the second rising in the first half of the 90s and falling in the second

half. half. However, the trajectory of upper-tail inequality However, the trajectory of upper-tail inequality

(90/50) diverged from lower-tail inequality (90/50) diverged from lower-tail inequality (50/10). (50/10). • Upper-tail inequality has increased steadily since 1980. Upper-tail inequality has increased steadily since 1980. • Lower-tail inequality rose quickly in the first half of the Lower-tail inequality rose quickly in the first half of the

1980s, and flattened out and contracted afterwards. 1980s, and flattened out and contracted afterwards. Polarization of work: Polarization of work:

• Employment has increased in high-wage and low-wage Employment has increased in high-wage and low-wage work, at the expense of middle-wage jobs. work, at the expense of middle-wage jobs.


Explanation of PolarizationExplanation of Polarization

Recent advances in IT and Recent advances in IT and telecommunications telecommunications • complement creative, high-education complement creative, high-education

tasks and tasks and • substitute for routine, middle-education substitute for routine, middle-education

tasks. tasks.


ReferencesReferences

Autor, David H., L. Katz, and Kearny, Autor, David H., L. Katz, and Kearny, “Trends in US Inequality: Revising the “Trends in US Inequality: Revising the Revisionists,” March 2007, mimeo.Revisionists,” March 2007, mimeo.

Dustmann, Christian, Johannes Ludstek, Dustmann, Christian, Johannes Ludstek, and Uta Schönberg, “Revisiting the and Uta Schönberg, “Revisiting the German Wage Structure,” IZA DP 2685, German Wage Structure,” IZA DP 2685, March 2007. March 2007.

Goos, M. and A. Manning, 2007, “Lousy Goos, M. and A. Manning, 2007, “Lousy and Lovely Jobsand Lovely Jobs: : The Rising Polarization of The Rising Polarization of Work in Britain,” Review of Economics and Work in Britain,” Review of Economics and Statistics, 89, 118-133. Statistics, 89, 118-133.


Three Important Recent Three Important Recent PhenomenaPhenomena

(1) The geographic decomposition of (1) The geographic decomposition of value chainsvalue chains• The new advances in information and The new advances in information and

telecommunications technologies permitted a telecommunications technologies permitted a vast expansion in the goods and services that vast expansion in the goods and services that became tradable. became tradable.

• This, together with huge improvements in This, together with huge improvements in logistics, are enabling firms nowadays to logistics, are enabling firms nowadays to decompose their various stages of production decompose their various stages of production geographically into clusters of tasks, locating geographically into clusters of tasks, locating each task cluster in the countries and regions each task cluster in the countries and regions where it is most profitable.where it is most profitable.


This has two important implications: This has two important implications: • Sectors are becoming increasingly irrelevant in Sectors are becoming increasingly irrelevant in

determining job security. It is no longer the case that determining job security. It is no longer the case that jobs are relatively secure in the growing sunrise sectors jobs are relatively secure in the growing sunrise sectors and relatively insecure in the shrinking sunset sectors. and relatively insecure in the shrinking sunset sectors. The reason is that jobs in the growing sectors can be The reason is that jobs in the growing sectors can be outsourced and offshored. Sectors are no longer the outsourced and offshored. Sectors are no longer the relevant entities for determining the geographic security relevant entities for determining the geographic security of jobs.of jobs.

• Skills required for the performance of routine tasks – Skills required for the performance of routine tasks – regardless of whether they have traditionally been regardless of whether they have traditionally been associated with high-skill work – are no longer a associated with high-skill work – are no longer a guarantee for rising wages and job security. The reason guarantee for rising wages and job security. The reason is that such tasks may be electronically transmittable is that such tasks may be electronically transmittable and thus internationally outsourcable. and thus internationally outsourcable.


(2) The Rising Importance of (2) The Rising Importance of Personal RelationshipsPersonal Relationships

Independently of comparative advantage, three types of tasks Independently of comparative advantage, three types of tasks appear secure from international outsourcing: appear secure from international outsourcing:

• Physical delivery tasksPhysical delivery tasks, involving physical delivery to customers: For , involving physical delivery to customers: For example, waiters are required in the restaurants where customers example, waiters are required in the restaurants where customers are eating their meals; construction workers are needed where are eating their meals; construction workers are needed where homeowners wish to place their houses. The jobs of gardeners, taxi homeowners wish to place their houses. The jobs of gardeners, taxi drivers, and retail sales personnel are also secure. drivers, and retail sales personnel are also secure.

• Nonsystematizable tasksNonsystematizable tasks, which cannot be defined in terms of , which cannot be defined in terms of routine procedures: People engaged in creative and leadership tasks routine procedures: People engaged in creative and leadership tasks – for example, managers or researchers working on common – for example, managers or researchers working on common projects – often require physical contact to be effective. projects – often require physical contact to be effective.

• Personal relationship tasksPersonal relationship tasks: The work of psychotherapists, nurses, : The work of psychotherapists, nurses, school teachers, and social workers crucially involves building school teachers, and social workers crucially involves building personal relationships and these also require physical presence with personal relationships and these also require physical presence with the recipients of these services. the recipients of these services.

These three sets of tasks cut across the divide between the sunrise These three sets of tasks cut across the divide between the sunrise and sunset sectors, and between skilled and unskilled workers. and sunset sectors, and between skilled and unskilled workers. Increasingly, we cannot expect the demand for skilled labor to Increasingly, we cannot expect the demand for skilled labor to rise relative to the demand for unskilled labor, regardless of the rise relative to the demand for unskilled labor, regardless of the nature of these skills. nature of these skills.


(3) The increasing flexibility, (3) The increasing flexibility, heterogeneity and versatility of workheterogeneity and versatility of work

The command-and-control style of management - The command-and-control style of management - where authority flows from the senior executives where authority flows from the senior executives down through middle management to the workers in down through middle management to the workers in the functional departments - is being replaced by the functional departments - is being replaced by flatter organizational structures, in which customer-flatter organizational structures, in which customer-oriented teams report to the central management oriented teams report to the central management with few, if any, intermediaries. These teams with few, if any, intermediaries. These teams frequently require multi-tasking, job rotation, and frequently require multi-tasking, job rotation, and sharing of multiple responsibilities. sharing of multiple responsibilities.

Furthermore, occupational barriers are breaking Furthermore, occupational barriers are breaking down in the new types of business organizations, as down in the new types of business organizations, as employees are given multiple responsibilities. In this employees are given multiple responsibilities. In this environment, traditional occupational distinctions environment, traditional occupational distinctions begin to lose their significance and what we mean by begin to lose their significance and what we mean by “skilled” versus “unskilled” workers becomes “skilled” versus “unskilled” workers becomes radically changed. radically changed.


By implication, skilled work is becoming more By implication, skilled work is becoming more heterogeneous. heterogeneous. • To succeed in the skilled labour market nowadays, people To succeed in the skilled labour market nowadays, people

need more than competence in their specialized need more than competence in their specialized occupation. occupation.

• They also need to combine their occupational skills with They also need to combine their occupational skills with social competence and knowledge of other jobs (so that social competence and knowledge of other jobs (so that they can deal with customers and communicate effectively they can deal with customers and communicate effectively with other members of their team), as well as the ability to with other members of their team), as well as the ability to adapt their skills to changing customer needs. adapt their skills to changing customer needs.

• As this process proceeds, skilled workers are increasingly As this process proceeds, skilled workers are increasingly choosing portfolios of skills that are appropriate to their choosing portfolios of skills that are appropriate to their individual abilities and their customers’ preferences. individual abilities and their customers’ preferences.

• Since these abilities and preferences are heterogeneous, Since these abilities and preferences are heterogeneous, the nature of work is becoming increasingly the nature of work is becoming increasingly heterogeneous as well.heterogeneous as well.


The Reorganisation of The Reorganisation of WorkWork

Historical backgroundHistorical background Driving forces underlying the Driving forces underlying the

Organisational RevolutionOrganisational Revolution Broad-based empirical evidenceBroad-based empirical evidence Case studiesCase studies Features of the Organisational Features of the Organisational

RevolutionRevolution


Implications Implications • for inequalityfor inequality• for labor market institutionsfor labor market institutions• for labor market policiesfor labor market policies


Historical backgroundHistorical background

The division of laborThe division of labor• in production in production • in managementin management

The Industrial Revolution versus the The Industrial Revolution versus the Organisational RevolutionOrganisational Revolution


Driving forcesDriving forces

Changes in physical capitalChanges in physical capital Changes in information technologiesChanges in information technologies Changes in human capitalChanges in human capital Changes in preferences of employees Changes in preferences of employees

and customersand customers


Broad-based empirical evidenceBroad-based empirical evidence

Decentralisation of decision makingDecentralisation of decision making Multi-taskingMulti-tasking Complementarities between Complementarities between

organisational change and skillsorganisational change and skills


Case studiesCase studies

KodakKodak IBM CreditIBM Credit Bell AtlanticBell Atlantic HallmarkHallmark Volvo’s laudryVolvo’s laudry McKessonMcKesson


Features of the Organisational Features of the Organisational RevolutionRevolution

Organisation of authority within firmsOrganisation of authority within firms Organisation of design, production, Organisation of design, production,

and marketingand marketing Organisation of purchaser-provider Organisation of purchaser-provider

relationshipsrelationships Breakdown of organisational barriersBreakdown of organisational barriers


AnalyticsAnalytics

Definitions:Definitions: nnjj = number of type- = number of type-jj workers workers ijij = fraction of worker = fraction of worker jj’s available time devoted ’s available time devoted

to task to task iiwhere where 1j1j + + 2j2j= 1= 1 eeijij = productivity of the type- = productivity of the type-j j worker at task worker at task

iiper unit of time)per unit of time) Then Then eeii11 i i11nn11 + + eeii22 i i22nn22 is the amount of labor is the amount of labor

services devoted to task services devoted to task ii


Production Functions:Production Functions: The The production function in task production function in task

space:space:

The production function in people The production function in people space:space:

11 11 1 12 22 2 21 11 1 22 22 21 , 1q f e n e n e n e n

11 11 21 11 1 12 22 22 22 21 , 1q g e e n e e n


The productivity of worker The productivity of worker j j at task at task ii depends on his exposure to the task: depends on his exposure to the task:

eeij ij = = eeijij ijij).). The Organizational Choice:The Organizational Choice:

The firm’s labor cost be The firm’s labor cost be

1 1 2 2c w n w n


The firm’s problem: The firm’s problem: • Maximize Maximize = q - c = q - c, with respect to , with respect to nnjj

and and jjjj, subject to the predetermined , subject to the predetermined wages wages wwjj and and

1,jj ij i j


The Optimal Organization of The Optimal Organization of WorkWork

TjjHjj

jj


Implications for inequalityImplications for inequality

Redefinition of skillsRedefinition of skills Rising earnings dispersionRising earnings dispersion Rising education wage premiumRising education wage premium The gender premiumThe gender premium Earnings instabilityEarnings instability Within-group inequalityWithin-group inequality


Implications for labor market Implications for labor market institutionsinstitutions

Centralised bargainingCentralised bargaining Unemployment benefit systemsUnemployment benefit systems Job security legislationJob security legislation


Implications for labor market Implications for labor market policiespolicies

Market failuresMarket failures• Efficiency wagesEfficiency wages• Acquisition of skillsAcquisition of skills

Education and trainingEducation and training Policy proposalsPolicy proposals

Documents

Earnings Inequality 1 Inequality and Growth Dennis J. Snower