TY - JOUR
T1 - Changes in relative wages in the 1980s
T2 - Returns to observed and unobserved skills and black-white wage differentials
AU - Chay, Kenneth Y.
AU - Lee, David S.
N1 - Funding Information:
We are indebted to David Card, Bo Honoré, and Larry Katz for many helpful discussions, and to two referees for insightful comments. We also thank countless colleagues and seminar participants for helpful suggestions. Financial support from the NSF Traineeship in the Economics of Education is gratefully acknowledged.
PY - 2000/11
Y1 - 2000/11
N2 - We assess the potential contribution of a rise in the return to unmeasured productivity correlated with education and race to the dramatic increase in the college-high-school wage differential and the stagnation of black-white wage convergence during the 1980s. A relatively unrestricted error-components panel data model is used to estimate the rise in the unobserved skill premium. Identification of the model is based on across-group variation in changes in within-group log-wage variances over time. In the absence of credible instruments for education and race, we calibrate the impact of time-varying 'ability' biases under various assumptions on the extent of non-random sorting of ability. Both between-cohort and within-cohort changes are examined using earnings data on men from multiple Current Population Surveys. There is systematic variation in changes in within-group wage variances over time, suggesting about a 10-25% rise in the unobserved skill premium during the 1980s. In addition, there are noticeable differences across cohorts in changes in the college-high-school wage gap. However, the model estimates imply that the rise in the return to ability can account for at most 30-40% of the observed rise in the college premium for young workers. Similarly, young, well-educated black men experienced at least a 0.13 log point decline in wages relative to their white counterparts between 1979 and 1991.
AB - We assess the potential contribution of a rise in the return to unmeasured productivity correlated with education and race to the dramatic increase in the college-high-school wage differential and the stagnation of black-white wage convergence during the 1980s. A relatively unrestricted error-components panel data model is used to estimate the rise in the unobserved skill premium. Identification of the model is based on across-group variation in changes in within-group log-wage variances over time. In the absence of credible instruments for education and race, we calibrate the impact of time-varying 'ability' biases under various assumptions on the extent of non-random sorting of ability. Both between-cohort and within-cohort changes are examined using earnings data on men from multiple Current Population Surveys. There is systematic variation in changes in within-group wage variances over time, suggesting about a 10-25% rise in the unobserved skill premium during the 1980s. In addition, there are noticeable differences across cohorts in changes in the college-high-school wage gap. However, the model estimates imply that the rise in the return to ability can account for at most 30-40% of the observed rise in the college premium for young workers. Similarly, young, well-educated black men experienced at least a 0.13 log point decline in wages relative to their white counterparts between 1979 and 1991.
KW - Changing wage inequality
KW - Error-components models of earnings differentials
KW - Time-varying ability biases
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U2 - 10.1016/S0304-4076(00)00029-4
DO - 10.1016/S0304-4076(00)00029-4
M3 - Article
AN - SCOPUS:0347948992
SN - 0304-4076
VL - 99
SP - 1
EP - 38
JO - Journal of Econometrics
JF - Journal of Econometrics
IS - 1
ER -