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Real Wage Inequality

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  • Enrico Moretti

Abstract

A large literature has documented a significant increase in the difference between the wage of college graduates and high school graduates over the past 30 years. I show that from 1980 to 2000, college graduates have experienced relatively larger increases in cost of living, because they have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. When I deflate nominal wages using a location-specific CPI, I find that the difference between the wage of college graduates and high school graduates is lower in real terms than in nominal terms and has grown less. At least 22% of the documented increase in college premium is accounted for by spatial differences in the cost of living. The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model of the labor and housing markets, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, the higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand for college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers’ standard of living is offset by the higher cost of living. The evidence indicates that changes in the geographical location of different skill groups are mostly driven by changes in their relative demand. I conclude that the increase in well-being disparities between 1980 and 2000 is smaller than the increase in nominal wage disparities that has been the focus of the previous literature.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14370.

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Date of creation: Sep 2008
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Publication status: published as Enrico Moretti, 2013. "Real Wage Inequality," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 65-103, January.
Handle: RePEc:nbr:nberwo:14370

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References

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  1. John Bound & Harry J. Holzer, 1996. "Demand Shifts, Population Adjustments, and Labor Market Outcomes during the 1980s," NBER Working Papers 5685, National Bureau of Economic Research, Inc.
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Cited by:
  1. Beach, Charles M., 2014. "What Has Happened to Middle-Class Earnings? Distributional Shifts in Earnings in Canada, 1970-2005," CLSSRN working papers clsrn_admin-2014-13, Vancouver School of Economics, revised 26 Mar 2014.
  2. Cinzia, Rienzo, 2010. "Real Wages, Wage Inequality and the Regional Cost-of-living in the UK," MPRA Paper 36390, University Library of Munich, Germany, revised Oct 2010.
  3. Veronica Guerrieri & Daniel Hartley & Erik Hurst, 2012. "Within-city variation in urban decline: the case of Detroit," Working Paper 1205, Federal Reserve Bank of Cleveland.
  4. Suzanne Kok & Bas ter Weel, 2014. "Cities, Tasks and Skills," CPB Discussion Paper 269, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Beaudry, Paul & Green, David A. & Sand, Benjamin M., 2014. "Spatial equilibrium with unemployment and wage bargaining: Theory and estimation," Journal of Urban Economics, Elsevier, vol. 79(C), pages 2-19.
  6. Lindley, Joanne & Machin, Stephen, 2014. "Spatial changes in labour market inequality," Journal of Urban Economics, Elsevier, vol. 79(C), pages 121-138.
  7. Thomas Kemeny, 2013. "Immigrant Diversity and Economic Development in Cities: A Critical Review," SERC Discussion Papers 0149, Spatial Economics Research Centre, LSE.
  8. Edward L. Glaeser & Joshua D. Gottlieb, 2009. "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 983-1028, December.
  9. Leonardi, Marco, 2010. "The Effect of Product Demand on Inequality: Evidence from the US and the UK," IZA Discussion Papers 5011, Institute for the Study of Labor (IZA).
  10. Kristen Monaco & Steffen Habermalz, 2011. "Wage Inequality of US Truck Drivers," LABOUR, CEIS, vol. 25(2), pages 268-285, 06.
  11. Andrea Brandolini & Alfonso Rosolia & Roberto Torrini, 2011. "The distribution of employees’ labour earnings in the European Union: Data, concepts and first results," Working Papers 198, ECINEQ, Society for the Study of Economic Inequality.
  12. Shihe Fu & Stephen Ross, 2010. "Wage Premia in Employment Clusters: How Important is Worker Heterogeneity?," Working Papers 2011-027, Human Capital and Economic Opportunity Working Group.
  13. Robert J. Gordon, 2009. "Misperceptions About the Magnitude and Timing of Changes in American Income Inequality," NBER Working Papers 15351, National Bureau of Economic Research, Inc.
  14. Lindley, Joanne & Machin, Stephen, 2013. "Spatial Changes in Labour Market Inequality," IZA Discussion Papers 7600, Institute for the Study of Labor (IZA).
  15. Kok, Suzanne & ter Weel, Bas, 2014. "Cities, Tasks and Skills," IZA Discussion Papers 8053, Institute for the Study of Labor (IZA).
  16. repec:wyi:journl:002155 is not listed on IDEAS

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